** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                        |
| **for the quarterly period ended June 30, 2006.**                                                                                                                                                                                                                                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                                                                  |
| **Or**                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                        |
| **o Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                                                                                                                  |
| **for the transition period  from                                                        to** |
|                                                                                                                                                                                                                                                                                                                                                                        |
| **Commission File Number 000-50266**                                                                                                                                                                                                                                                                                                                                        |

 

**TRINITY CAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **New Mexico**            |   | **85-0242376**                           |
|---------------------------|--------|------------------------------------------|
| (State of  incorporation) |   | (I.R.S. Employer  Identification Number) |

 

 

**1200 Trinity Drive, Los Alamos, NewMexico 87544**

(Address of principal executive offices)

 

**(505) 662-5171**

Telephone number

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.  **x**  Yes  **o**  No

Indicate by check mark whether the registrant is alarge accelerated filed, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one)

| Large Accelerated  Filer  **o** |   | Accelerated  Filer  **x** |   | Non-Accelerated  Filer  **o** |
|-------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  **o**  Yes  **x**  No

APPLICABLE ONLY TO CORPORATEISSUERS:

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:6,579,249 shares of common stock, no par value, outstanding as of August 3,2006.

 

 

----

**TRINITYCAPITAL CORPORATION AND SUBSIDIARIES**
| **PART I. FINANCIAL  INFORMATION** |
|-----------------------------------------|
| ** **                              | ** ** | ** ** |
| Item 1.                                 | Financial Statements |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                                 | Controls and  Procedures |   |
|                                    |   |   |
| **PART II.  OTHER INFORMATION**    |
| ** **                              | ** ** | ** ** |
| Item 1.                                 | Legal Proceedings |   |
| Item  1A.                               | Risk  Factors |   |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
| Item 3.                                 | Defaults upon  Senior Securities |   |
| Item 4.                                 | Submission of  Matters to a Vote of Securities Holders |   |
| Item 5.                                 | Other Information |   |
| Item  6.                                | Exhibits |   |
|                                    | SIGNATURES |   |

 

 

----

**PART I— FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**TRINITY CAPITALCORPORATION & SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**June 30, 2006 and December 31,2005**

**(Amountsin thousands, except share data)**
| ** **                                                                                                                                                                                                                                                                                                                              | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                              | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                              |       |                    |       |                        |       |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                 |       | $                       | 29,014     |                        | $          | 24,547 |   |
| Interest bearing  deposits with banks                                                                                                                                                                                                                                                                                                   |       | 81                      |       | 29,122                      |       |
| Federal funds sold and  securities purchased under resell agreements                                                                                                                                                                                                                                                                    |       | 137                     |       | 1,013                       |       |
| **Cash  and cash equivalents**                                                                                                                                                                                                                                                                                                          |       | $                       | 29,232     |                        | 54,682     |   |
| Investment securities  available for sale                                                                                                                                                                                                                                                                                               |       | 78,575                  |       | 91,231                      |       |
| Investment securities  held to maturity, at amortized cost (fair value of $15,223 at June 30,  2006 and $26,565 at December 31, 2005)                                                                                                                                                                                         |       | 15,242                  |       | 26,612                      |       |
| Other investments                                                                                                                                                                                                                                                                                                                       |       | 8,800                   |       | 7,965                       |       |
| Loans (net of allowance  for loan losses of $10,116 at June 30, 2006 and $8,842 at December 31,  2005)                                                                                                                                                                                                                             |       | 1,088,830               |       | 1,010,538                   |       |
| Loans held for sale                                                                                                                                                                                                                                                                                                                     |       | 6,093                   |       | 7,588                       |       |
| Premises and equipment,  net                                                                                                                                                                                                                                                                                                            |       | 23,909                  |       | 24,401                      |       |
| Accrued interest  receivable                                                                                                                                                                                                                                                                                                            |       | 7,570                   |       | 7,321                       |       |
| Mortgage servicing  rights, net                                                                                                                                                                                                                                                                                                         |       | 9,564                   |       | 9,779                       |       |
| Other real estate owned                                                                                                                                                                                                                                                                                                                 |       | 290                     |       | 375                         |       |
| Other assets                                                                                                                                                                                                                                                                                                                            |       | 3,267                   |       | 3,524                       |       |
| **Total  assets**                                                                                                                                                                                                                                                                                                                       |       | $                       | 1,271,372  |                        | $          | 1,244,016 |   |
|                                                                                                                                                                                                                                                                                                                                    |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Liabilities                                                                                                                                                                                                                                                                                                                             |       |                    |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                                                               |       |                    |       |                        |       |
| Noninterest  bearing                                                                                                                                                                                                                                                                                                                    |       | $                       | 92,860     |                        | $          | 79,030 |   |
| Interest bearing                                                                                                                                                                                                                                                                                                                        |       | 951,228                 |       | 962,818                     |       |
| **Total  deposits**                                                                                                                                                                                                                                                                                                                     |       | 1,044,088               |       | 1,041,848                   |       |
| Short-term  borrowings                                                                                                                                                                                                                                                                                                                  |       | 41,416                  |       | 10,000                      |       |
| Long-term  borrowings                                                                                                                                                                                                                                                                                                                   |       | 63,620                  |       | 72,306                      |       |
| Junior  subordinated debt owed to unconsolidated trusts                                                                                                                                                                                                                                                                                 |       | 32,992                  |       | 32,992                      |       |
| Borrowings made  by Employee Stock Ownership Plan (ESOP) to outside parties                                                                                                                                                                                                                                                             |       | 743                     |       | 1,214                       |       |
| Accrued interest  payable                                                                                                                                                                                                                                                                                                               |       | 4,197                   |       | 4,047                       |       |
| Other  liabilities                                                                                                                                                                                                                                                                                                                      |       | 5,293                   |       | 5,991                       |       |
| **Total  liabilities**                                                                                                                                                                                                                                                                                                                  |       | 1,192,349               |       | 1,168,398                   |       |
| Stock owned by Employee  Stock Ownership Plan (ESOP) participants; 623,319 shares and  614,558 shares at June 30, 2006 and December 31, 2005,  respectively, at fair value; net of unearned ESOP shares of 45,697 and  72,243 shares at June 30, 2006 and December 31, 2005, respectively,  at historical cost |       | 16,628                  |       | 16,100                      |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                               |       |                    |       |                        |       |
| Common stock, no  par, authorized 20,000,000 shares; issued 6,856,800 shares, shares  outstanding 6,577,756 and 6,554,559 at June 30, 2006 and December 31,  2005, respectively                                                                                                                                          |       | 6,836                   |       | 6,836                       |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                             |       | 1,021                   |       | 922                         |       |
| Retained  earnings                                                                                                                                                                                                                                                                                                                      |       | 61,114                  |       | 58,013                      |       |
| Accumulated  other comprehensive (loss)                                                                                                                                                                                                                                                                                                 |       | (465                    | )          | (273                        | )          |
| Total  stockholders’ equity before treasury stock                                                                                                                                                                                                                                                                                  |       | 68,506                  |       | 65,498                      |       |
| Treasury stock, at  cost, 233,347 shares and 229,998 shares at June 30, 2006 and December 31,  2005, respectively                                                                                                                                                                                                        |       | (6,111                  | )          | (5,980                      | )          |
| **Total  stockholders’ equity**                                                                                                                                                                                                                                                                                                    |       | 62,395                  |       | 59,518                      |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                                                                                                                                                                    |       | $                       | 1,271,372  |                        | $          | 1,244,016 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

1

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**For the Three and Six Months EndedJune 30, 2006 and 2005**

**(Amounts in thousands except shareand per share data)**

**(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005**    | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
| Interest income:                                         |       |                             |       |                           |       |   |   |   |   |
| Loans, including  fees                                   |       | $                                | 19,712     |                           | $          | 15,475 |   | $ | 37,615 |   | $ | 29,697 |   |
| Investment  securities:                                  |       |                             |       |                           |       |   |   |   |   |
| Taxable                                                  |       | 909                              |       | 574                            |       | 1,900 |   | 1,230 |   |
| Nontaxable                                               |       | 199                              |       | 179                            |       | 402 |   | 359 |   |
| Federal funds sold                                       |       | 2                                |       | 4                              |       | 5 |   | 8 |   |
| Other interest  bearing deposits                         |       | 21                               |       | 79                             |       | 153 |   | 99 |   |
| Investment in  unconsolidated trusts                     |       | 22                               |       | 15                             |       | 44 |   | 31 |   |
| **Total  interest income**                               |       | 20,865                           |       | 16,326                         |       | 40,119 |   | 31,424 |   |
| Interest expense:                                        |       |                             |       |                           |       |   |   |   |   |
| Deposits                                                 |       | 7,448                            |       | 4,761                          |       | 13,990 |   | 8,742 |   |
| Short-term  borrowings                                   |       | 281                              |       | 21                             |       | 419 |   | 123 |   |
| Long-term  borrowings                                    |       | 628                              |       | 826                            |       | 1,308 |   | 1,403 |   |
| Junior  subordinated debt owed to unconsolidated trusts  |       | 736                              |       | 536                            |       | 1,464 |   | 1,055 |   |
| **Total  interest expense**                              |       | 9,093                            |       | 6,144                          |       | 17,181 |   | 11,323 |   |
| **Net interest income**                                  |       | 11,772                           |       | 10,182                         |       | 22,938 |   | 20,101 |   |
| Provision for loan  losses                               |       | 900                              |       | 825                            |       | 2,800 |   | 1,350 |   |
| **Net  interest income after provision for loan losses** |       | 10,872                           |       | 9,357                          |       | 20,138 |   | 18,751 |   |
| Other income:                                            |       |                             |       |                           |       |   |   |   |   |
| Mortgage loan  servicing fees                            |       | 667                              |       | 659                            |       | 1,307 |   | 1,261 |   |
| Loan and other  fees                                     |       | 812                              |       | 709                            |       | 1,521 |   | 1,297 |   |
| Service charges  on deposits                             |       | 397                              |       | 368                            |       | 778 |   | 699 |   |
| Gain on sale of  loans                                   |       | 591                              |       | 638                            |       | 891 |   | 1,101 |   |
| Other operating  income                                  |       | 436                              |       | 319                            |       | 802 |   | 395 |   |
|                                                     |       | 2,903                            |       | 2,693                          |       | 5,299 |   | 4,753 |   |
| Other expenses:                                          |       |                             |       |                           |       |   |   |   |   |
| Salaries and  employee benefits                          |       | 4,423                            |       | 3,963                          |       | 8,848 |   | 8,021 |   |
| Occupancy                                                |       | 828                              |       | 794                            |       | 1,685 |   | 1,593 |   |
| Data processing                                          |       | 427                              |       | 415                            |       | 895 |   | 905 |   |
| Marketing                                                |       | 504                              |       | 406                            |       | 941 |   | 730 |   |
| Amortization and  valuation of mortgage servicing rights |       | 471                              |       | 934                            |       | 1,022 |   | 1,064 |   |
| Supplies                                                 |       | 149                              |       | 191                            |       | 350 |   | 400 |   |
| Loss on sale of  other real estate owned                 |       | 34                               |       | 308                            |       | 232 |   | 827 |   |
| Postage                                                  |       | 146                              |       | 140                            |       | 303 |   | 310 |   |
| Other                                                    |       | 1,351                            |       | 1,142                          |       | 2,450 |   | 2,101 |   |
|                                                     |       | 8,333                            |       | 8,293                          |       | 16,726 |   | 15,951 |   |
| **Income  before income taxes**                          |       | 5,442                            |       | 3,757                          |       | 8,711 |   | 7,553 |   |
| Income taxes                                             |       | 2,100                            |       | 1,316                          |       | 3,268 |   | 2,744 |   |
| Net income                                               |       | $                                | 3,342      |                           | $          | 2,441 |   | $ | 5,443 |   | $ | 4,809 |   |
| Basic earnings per  common share                         |       | $                                | 0.51       |                           | $          | 0.37 |   | $ | 0.83 |   | $ | 0.72 |   |
| Diluted earnings per common share                        |       | $                                | 0.50       |                           | $          | 0.36 |   | $ | 0.82 |   | $ | 0.71 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

2

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months EndedJune 30, 2006 and 2005**

**(Amounts in thousands)**

**(Unaudited)**
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| ** **                                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash Flows From  Operating Activities                                                        |       |                           |       |   |   |
| Net income                                                                                   |       | $                              | 5,443      |   | $ | 4,809 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:           |       |                           |       |   |   |
| Depreciation and  amortization                                                               |       | 1,267                          |       | 1,257 |   |
| Net amortization  of:                                                                        |       |                           |       |   |   |
| Mortgage  servicing rights                                                                   |       | 1,356                          |       | 1,380 |   |
| Premiums and  discounts on investment securities                                             |       | (109                           | )          | 535 |   |
| Junior  subordinated debt owed to unconsolidated trusts issuance costs                       |       | 10                             |       | 10 |   |
| Provision for  loan losses                                                                   |       | 2,800                          |       | 1,350 |   |
| Recovery of  mortgage servicing rights                                                       |       | (334                           | )          | (316 | ) |
| Loss on disposal  of premises and equipment                                                  |       | 14                             |       | 143 |   |
| Federal Home  Loan Bank (FHLB) stock dividends received                                      |       | (126                           | )          | (90 | ) |
| Gain on sale of  loans                                                                       |       | (891                           | )          | (1,101 | ) |
| (Gain) loss on  disposal of other real estate owned                                          |       | (15                            | )          | 125 |   |
| Write-down of  value of other real estate owned                                              |       | 40                             |       | 702 |   |
| Decrease in  other assets                                                                    |       | (2                             | )          | (1,552 | ) |
| Decrease in  other liabilities                                                               |       | (402                           | )          | (185 | ) |
| Release of  Employee Stock Ownership Plan (ESOP) shares                                      |       | 633                            |       | 877 |   |
| **Net  cash provided by operating activities before originations and gross sales of  loans** |       | 9,684                          |       | 7,944 |   |
| Gross sales of  loans held for sale                                                          |       | 76,883                         |       | 83,638 |   |
| Origination of  loans held for sale                                                          |       | (75,304                        | )          | (86,393 | ) |
| **Net  cash provided by operating activities**                                               |       | 11,263                         |       | 5,189 |   |
| Cash Flows From  Investing Activities                                                        |       |                           |       |   |   |
| Proceeds from  maturities and paydowns of investment securities, available for sale          |       | 12,490                         |       | 4,355 |   |
| Proceeds from  maturities and paydowns of investment securities, held to maturity            |       | 11,311                         |       | 18,244 |   |
| Proceeds from  maturities and paydowns of investment securities, other                       |       | —                         |       | 325 |   |
| Purchase of  investment securities other                                                     |       | (709                           | )          | (678 | ) |
| Proceeds from  sale of other real estate owned                                               |       | 60                             |       | 3,432 |   |
| Loans funded,  net of repayments                                                             |       | (81,092                        | )          | (102,127 | ) |
| Purchases of  premises and equipment                                                         |       | (789                           | )          | (1,038 | ) |
| Proceeds from  sale of premises and equipment                                                |       | —                         |       | 100 |   |
| **Net  cash (used in) investing activities**                                                 |       | (58,729                        | )          | (77,387 | ) |
| Cash Flows From  Financing Activities                                                        |       |                           |       |   |   |
| Net (decrease)  increase in demand deposits, NOW accounts and savings accounts               |       | (671                           | )          | 9,831 |   |
| Net increase in  time deposits                                                               |       | 2,911                          |       | 80,390 |   |
| Proceeds from  issuances of borrowings                                                       |       | 26,700                         |       | 30,000 |   |
| Repayment of  borrowings                                                                     |       | (3,970                         | )          | (38,210 | ) |
| Repayment of  ESOP debt                                                                      |       | (471                           | )          | (472 | ) |
| Proceeds from  issuance of trust preferred securities                                        |       | —                         |       | 10,310 |   |
| Purchase of  treasury stock                                                                  |       | (840                           | )          | (4,422 | ) |
| Issuance of  common stock for stock option plan                                              |       | 442                            |       | 1,046 |   |
| Dividend  payments                                                                           |       | (2,256                         | )          | (2,049 | ) |
| Tax benefit  recognized for exercise of stock options                                        |       | 171                            |       | (497 | ) |
| **Net  cash provided by financing activities**                                               |       | 22,016                         |       | 85,927 |   |
| **Net  (decrease) increase in cash and cash equivalents**                                    |       | (25,450                        | )          | 13,729 |   |
| Cash and cash  equivalents:                                                                  |       |                           |       |   |   |
| Beginning of  year                                                                           |       | 54,682                         |       | 23,814 |   |
| End of period                                                                                |       | $                              | 29,232     |   | $ | 37,543 |   |
| Supplemental  Disclosures of Cash Flow Information                                           |       |                           |       |   |   |
| Cash payments  for:                                                                          |       |                           |       |   |   |
| Interest                                                                                     |       | $                              | 17.031     |   | $ | 10,907 |   |
| Income taxes                                                                                 |       | 2,549                          |       | 3,247 |   |
| Non-cash  investing and financing activities:                                                |       |                           |       |   |   |
| Transfers from  loans to other real estate owned                                             |       | —                         |       | 475 |   |
| Dividends  declared, not yet paid                                                            |       | 2,252                          |       | 2,012 |   |
| Change in unrealized  gain on investment securities, net of taxes                            |       | (192                           | )          | (51 | ) |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

3

----

**TRINITY CAPITALCORPORATION & SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**Note 1.  Basis ofPresentation**

The accompanying unaudited consolidated financialstatements include the consolidated balances and results of operations of TrinityCapital Corporation (“Trinity”) and its wholly owned subsidiaries: Los AlamosNational Bank (the “Bank”), Title Guaranty & Insurance Company (“TitleGuaranty”), TCC Appraisal Services Corporation (“TCC Appraisal”), TCC AdvisorsCorporation (“TCC Advisors”) and TCC Funds, collectively referred to as the “Company.” Trinity Capital Trust I (“Trust I”), Trinity Capital Trust II (“Trust II”),Trinity Capital Trust III (“Trust III”) and Trinity Capital Trust IV (“Trust IV”),collectively referred to as the “Trusts,” are trust subsidiaries of Trinity butare not consolidated in these financial statements (see “Consolidation”accounting policy below).  The business activities of the Company consistsolely of the operations of its wholly owned subsidiaries. All significantinter-company balances and transactions have been eliminated inconsolidation.  In the opinion of management, all adjustments (consisting only of normalrecurring adjustments) necessary for a fair presentation of the financialposition, results of operations and cash flows for the interim periods havebeen made.  The results of operations for the three and six months endedJune 30, 2006 are not necessarily indicative of the results to be expected forthe entire fiscal year.

The unaudited consolidatedinterim financial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America and industrypractice.  Certain information in footnote disclosures normally includedin financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America and industry practice hasbeen condensed or omitted pursuant to rules and regulations of the Securitiesand Exchange Commission.  These financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s December 31, 2005 audited financial statements filedon Form 10-K, as amended.

The preparation of financialstatements in conformity with accounting principals generally accepted in theUnited States of America requires management to make estimates and assumptionswhich affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities as of the date of the financial statements,as well as the reported amounts of income and expenses during the reportedperiods.  Actual results could differ from those estimates.

**Note 2.  Comprehensive Income**

Comprehensive income includes net income, as well asthe change in net unrealized gain on investment securities available for sale,net of tax.  Comprehensive income was $3.2 million and $2.5 million forthe three month periods ended June 30, 2006 and 2005, respectively, and $5.3million and $4.9 million for the six month periods ended June 30, 2006 and2005, respectively.

**Note 3.  Earnings Per Share Data**

The following table sets forth the computation ofbasic and diluted earnings per share for the periods indicated:
| ** **                                                                         | ** ** | **Three Months Ended**                                                                       | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**                                                                                      | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2006**                                                                                               | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited; in thousands, except share and per share data)** | ** ** |
| Net income                                                                         |       | $                                                                                                      | 3,342      |                           | $          | 2,441 |   | $ | 5,443 |   | $ | 4,809 |   |
| Weighted average  common shares issued                                             |       | 6,856,800                                                                                              |       | 6,856,800                      |       | 6,856,800 |   | 6,856,800 |   |
| LESS: Weighted  average treasury stock shares                                      |       | (229,877                                                                                               | )          | (174,337                       | )          | (227,088 | ) | (136,995 | ) |
| LESS: Weighted  average unearned Employee Stock Ownership Plan (ESOP) stock shares |       | (45,666                                                                                                | )          | (73,346                        | )          | (48,379 | ) | (75,968 | ) |
| Weighted average  common shares outstanding, net                                   |       | 6,581,257                                                                                              |       | 6,609,117                      |       | 6,581,333 |   | 6,643,837 |   |
| Basic earnings  per common share                                                   |       | $                                                                                                      | 0.51       |                           | $          | 0.37 |   | $ | 0.83 |   | $ | 0.72 |   |
| Weighted average  dilutive shares from stock option plan                           |       | 37,457                                                                                                 |       | 95,653                         |       | 37,865 |   | 97,257 |   |
| Weighted average  common shares outstanding including dilutive shares              |       | 6,618,714                                                                                              |       | 6,704,770                      |       | 6,619,198 |   | 6,741,094 |   |
| Diluted earnings per  common share                                                 |       | $                                                                                                      | 0.50       |                           | $          | 0.36 |   | $ | 0.82 |   | $ | 0.71 |   |

 

4

----

**Note 4.  Recent AccountingPronouncements and Regulatory Developments**

In December 2004, the FASB issued SFAS No. 123R,*Share-Based Payment*, which is anAmendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among otherthings, the manner in which share-based compensation, such as stock options andrestricted stock awards, will be accounted for by both public and non-publiccompanies. For public companies, the cost of employee services received inexchange for equity instruments including options and restricted stock awardsgenerally will be measured at fair value at the grant date. The grant date fairvalue will be estimated using option-pricing models adjusted for the uniquecharacteristics of those options and instruments, unless observable marketprices for the same or similar options are available. The cost will berecognized over the requisite service period, often the vesting period.

The changes in accounting replaced the existingrequirements under SFAS No. 123, Accounting for Stock-Based Compensation,and will eliminate the ability to account for share-based compensationtransactions using APB Opinion No. 25, Accounting for Stock Issued toEmployees, which does not require companies to expense options if the exerciseprice is equal to the trading price at the date of grant. The accounting forsimilar transactions involving parties other than employees or the accountingfor employee stock ownership plans that are subject to AICPA Statement ofPosition 93-6, Employers’ Accounting for Employee Stock Ownership Plans, wouldremain unchanged. See Note 12 below for the Company’s current application ofSFAS No. 123.

On April 14, 2005, the Securities and ExchangeCommission (“SEC”) announced the adoption of a new rule that amended thecompliance dates for SFAS No. 123R. Under SFAS No. 123R, the Company would havebeen required to implement the standard as of the beginning of the first interimperiod that begins after June 15, 2005. The SEC’s new rule allowed companies toimplement SFAS No. 123R at the beginning of their next fiscal year (beginningJanuary 1, 2006, in the case of the Company), instead of the next reportingperiod that begins after June 15, 2005. The SEC’s new rule did not change theaccounting required by SFAS No. 123R; it changed only the dates for compliancewith the standard. The adoption of this standard as of January 1, 2006decreased earnings for the Company by approximately $147 thousand during thefirst six months of 2006, and is projected to decrease income approximately$293 thousand for the entire year of 2006. The exact impact for 2006 and in theyears following will be dependent upon stock options granted, the estimatedvalue of these options and the vesting terms for the options granted.

In May 2005, the FASB issued SFAS No. 154, AccountingChanges and Error Corrections, which provides guidance on the accounting forand reporting of accounting changes and error corrections. It establishes,unless impracticable, retrospective application as the required method forreporting a change in accounting principle in the absence of explicittransition requirements specific to the newly adopted accounting principle. Thereporting of a correction of an error by restating previously issued financialstatements is also addressed by this statement. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Management does not believe that this statement willhave a material impact on the Company’s financial statements.

In February 2006, the FASB issued SFAS No. 155, Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB Statements No.133 and 140. This Statement resolves issues addressed in Statement 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterests in Securitized Financial Assets.”  This Statement eliminates theexemption from applying Statement 133 to interests in securitized financialassets so that similar instruments are accounted for similarly regardless ofthe form of the instruments. This Statement also improves financial reportingby allowing a preparer to elect fair value measurement at acquisition, atissuance, or when a previously recognized financial instrument is subject to are-measurement (new basis) event, on an instrument-by-instrument basis, incases in which a derivative would otherwise have to be bifurcated. Providing afair value measurement election also results in more financial instrumentsbeing measured at what the Board regards as the most relevant attribute forfinancial instruments, fair value. This Statement is effective for allfinancial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006. Management does notbelieve that this statement will have a material impact on the Company’sfinancial statements.

5

----

In March 2006, the FASB issued SFAS No. 156, Accountingfor Servicing of Financial Assets. The new Standard, which is an amendment toSFAS No. 140, *Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities-a replacementof FASB Statement No. 125*, will simplify the accounting forservicing assets and liabilities, such as those common with mortgagesecuritization activities.  Specifically,the new Standard addresses the recognition and measurement of separatelyrecognized servicing assets and liabilities and provides an approach tosimplify efforts to obtain hedge-like (offset) accounting.  The standard also: (1) clarifies when anobligation to service financial assets should be separately recognized as aservicing asset or a servicing liability; (2) requires that a separately recognizedservicing asset or servicing liability be initially measured at fair value, ifpracticable; (3) permits an entity with a separately recognized servicing assetor servicing liability to choose either the amortization method or the fairvalue method for subsequent measurement. SFAS No. 156 permits a servicer that uses derivative financialinstruments to offset risks on servicing to report both the derivativefinancial instrument and related servicing asset or liability by using aconsistent measurement attribute — fair value. This Statement is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006.  Management has notyet determined which method to adopt under this standard, and the estimatedimpact on the Company’s financial statements is not yet known.

In June 2005, the FASB issued Interpretation 48, Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.  This Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, Accounting for IncomeTaxes. This Interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. This Interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition.  This Interpretation is effective for fiscalyears beginning after December 15, 2006. Earlier application of the provisionsof this Interpretation is encouraged if the enterprise has not yet issuedfinancial statements, including interim financial statements, in the periodthis Interpretation is adopted. Management does not believe that adoption of this interpretation willhave a material impact on the Company’s financial statements.

**Note5.  Stock Option Plan**

The Company’s 1998 Stock Option Plan and 2005 StockIncentive Plan were created for the benefit of key management and selectemployees. Under the 1998 Stock Option Plan, 400,000 shares (as adjustedfor the stock split of December 19, 2002) from shares held in treasury orauthorized but unissued common stock are reserved for granting options. Underthe 2005 Stock Incentive Plan, 500,000 shares from shares held in treasury orauthorized but unissued common stock are reserved for granting stock-basedincentive awards.  Both of these planswere approved by the Company’s shareholders. The Board of Directors determines vesting and pricing of the awards. Allstock options granted through December 31, 2005 were granted at or abovethe fair value of the stock at the date of the grant, vest over three years andmust be exercised within ten years of the date of grant.  Stock appreciation rights granted afterDecember 31, 2005 were also granted at or above the fair value of the stock atthe date of the grant and mature at five years.

Effective January 1, 2006, the Company adopted SFASNo. 123(R), Share-Based Payment, which is an Amendment of FASB Statement Nos.123 and 95.  The Company adopted thisstandard using the modified prospective transition method.  Prior to the adoption of SFAS 123(R), theCompany measured stock-based compensation cost in accordance with the methodsprescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting forStock Issued to Employees.  Accordingly,no compensation cost was recognized for options granted and vested beforeJanuary 1, 2006.

Under the provisions of SFAS 123(R), the Company isrequired to recognize compensation expense for share-based compensation thatvest after adoption of the new standard. The Company uses the Black-Sholes model to value the stock options andstock appreciation rights on the date of the grant, and recognizes this expenseover the remaining vesting term for the stock options or stock appreciationrights.  Key assumptions used in thisvaluation method (detailed below) are the volatility of the Company’s stockprice, a risk-free rate of return (using the U.S. Treasury yield curve) basedon the expected term from grant date to exercise date and an annual dividendrate based upon the current market price. Expected term from grant date is based upon the historical time fromgrant to exercise experienced by the Company. Because share-based compensation vesting in the current periods weregranted on a variety of dates, the assumptions are presented as ranges in thoseassumptions.

 

6

----

The following table details the assumptions used inthe Black-Sholes model for share-based compensation granted:
| ** **               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                     |       |                                                |       |                                              |       |   |   |   |   |
| Stock price volatility   |       | —                                              |       | —                                            |       | 14.12 | % | — |   |
| Risk-free rate           |       | —                                              |       | —                                            |       | 4.35 | % | — |   |
| Expected dividends       |       | —                                              |       | —                                            |       | 2.29 | % | — |   |
| Expected term (in years) |       | —                                              |       | —                                            |       | 5 |   | — |   |

 

A summary of stock option and stock appreciation rightactivity under the plans as of June 30, 2006, and changes during the first sixmonths of the year is presented below:
| ** **                      | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contractual  Term, in years** | ** ** | **Aggregate Intrinsic  Value (in thousands)** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
|                            |       |       |       |                                      |       |                                                                       |       |                                                         |       |
| Outstanding at January  1, 2006 |       | 333,117    |       | $                                         | 23.15      |                                                                       |       |                                                         |       |   |
| Granted                         |       | 84,000     |       | 28.00                                     |       |                                                                       |       |                                                         |       |
| Exercised                       |       | (27,282    | )          | 10.88                                     |       |                                                                       |       |                                                         |       |
| Forfeited or expired            |       | (3,500     | )          | 28.00                                     |       |                                                                       |       |                                                         |       |
| Outstanding at June 30,  2006   |       | 386,335    |       | $                                         | 25.03      |                                                                       | 5.92       |                                                         | $          | 1,696 |   |
| Exerciseable at June 30, 2006   |       | 224,835    |       | $                                         | 21.86      |                                                                       | 5.47       |                                                         | $          | 929 |   |

 

There were no options granted during the three monthsending June 30, 2006.  Theweighted-average grant-date fair value of options granted during the six monthsending June 30, 2006 was $4.33.  Thetotal intrinsic value of options exercised during the six months ended June 30,2006 was $46 thousand.

As of June 30, 2006, there was $732 thousand of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the plans. That cost is expected to be recognized over a weighted-average vestingperiod of 4.0 years.  There were noshares vested during the six months ending June 30, 2006.  However, shares that will vest in August andDecember, 2006 have been ratably expensed in the amount of $74 thousand in thesecond quarter and $147 thousand in the first six months of 2006.

The following pro forma information presents netincome and earnings per share had the fair value method of SFAS No. 123 beenused to measure compensation cost for stock option plans in the second quarterand first six months of 2005.
| ** **                                                                                                                                    | ** ** | **Three Months  Ended June 30,  2005**             | ** ** | **Six Months  Ended June 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Net income as  reported                                                                                                                       |       | $                                                                 | 2,441      |                                                | $          | 4,809 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 28                                                                |       | 57                                                  |       |
| Pro forma net  income                                                                                                                         |       | $                                                                 | 2,413      |                                                | $          | 4,752 |   |
| Earnings per  share:                                                                                                                          |       |                                                              |       |                                                |       |
| Basic — as  reported                                                                                                                     |       | $                                                                 | 0.37       |                                                | $          | 0.72 |   |
| Basic — pro  forma                                                                                                                       |       | $                                                                 | 0.37       |                                                | $          | 0.72 |   |
| Diluted — as  reported                                                                                                                   |       | $                                                                 | 0.36       |                                                | $          | 0.71 |   |
| Diluted — pro  forma                                                                                                                     |       | $                                                                 | 0.36       |                                                | $          | 0.70 |   |

 

**Note 6.  Short Term Borrowings**

The Company had Federal Home Loan Bank advances withmaturity dates of less than one year of $41.4 million and $10.0 million as ofJune 30, 2006 and December 31, 2005, respectively.

7

----

**Note 7.  Long Term Borrowings**

The Company had Federal Home Loan Bank advances withmaturity dates greater than one year of $63.6 million and $72.3 million as ofJune 30, 2006 and December 31, 2005, respectively.  As of June 30,2006, the advances had fixed interest rates ranging from 3.22% to 6.34%.

**Note 8.  JuniorSubordinated Debt Owed to Unconsolidated Trusts**

The following table presents details on the juniorsubordinated debt owed to unconsolidated trusts as of June 30, 2006:
| ** **                                                  | ** ** | **Trust I**                     | ** ** | **Trust II**      | ** ** | **Trust III**     | ** ** | **Trust IV**      | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Date of issue                                               |       | March 23, 2000                  |       | November 28, 2001 |       | May 11, 2004      |       | June 29, 2005     |       |
| Amount of trust  preferred securities issued                |       | $                                    | 10,000     |                   | $          | 6,000                  |       | $                      | 6,000      |   | $ | 10,000 |   |
| Rate on trust  preferred securities                         |       | 10.875                               | %          | 9.95                   | %          | 7.93% (variable)       |       | 6.88                   | %          |
| Maturity                                                    |       | March 8, 2030                   |       | December 8, 2031  |       | September 8, 2034 |       | November 23, 2035 |       |
| Date of first  redemption                                   |       | March 8, 2010                   |       | December 8, 2006  |       | September 8, 2009 |       | August 23, 2010   |       |
| Common equity  securities issued                            |       | $                                    | 310        |                   | $          | 186                    |       | $                      | 186        |   | $ | 310 |   |
| Junior  subordinated deferrable interest debentures owed    |       | $                                    | 10,310     |                   | $          | 6,186                  |       | $                      | 6,186      |   | $ | 10,310 |   |
| Rate on junior  subordinated deferrable interest debentures |       | 10.875                               | %          | 9.95                   | %          | 7.93% (variable)       |       | 6.88                   | %          |

 

On the dates of issue indicated above, the Trusts,being Delaware statutory business trusts, issued trust preferred securities(the “trust preferred securities”) in the amount and at the rate indicatedabove.  These securities represent preferred beneficial interests in theassets of the Trusts.  The trust preferred securities will mature on thedates indicated, and are redeemable in whole or in part at the option of theCompany at any time after the date of first redemption indicated above, withthe approval of the Federal Reserve Board and in whole at any time upon theoccurrence of certain events affecting their tax or regulatory capitaltreatment.  The Trusts also issued common equity securities to Trinity inthe amounts indicated above.  The Trusts used the proceeds of the offeringof the trust preferred securities to purchase junior subordinated deferrableinterest debentures (the “debentures”) issued by the Company, which have termssubstantially similar to the trust preferred securities.  The Company hasthe right to defer payments of interest on the debentures at any time or from timeto time for a period of up to ten consecutive semi-annual periods with respectto each interest payment deferred.  Under the terms of the debentures,under certain circumstances of default or if the Company has elected to deferinterest on the debentures, the Company may not, with certain exceptions,declare or pay any dividends or distributions on its capital stock or purchaseor acquire any of its capital stock.  The Company used the majority of theproceeds from the sale of the debentures to add to Tier 1 or Tier 2 capital inorder to support its growth and to purchase treasury stock.

Trinity owns all of the outstanding common securitiesof the Trusts.  The Trusts are considered variable interest entities(VIEs) under *Financial Accounting StandardsBoard Interpretation (FIN) No. 46, “Consolidation of Variable InterestEntities, an interpretation of Accounting Research Bulletin No. 51”*,as revised.  Prior to FIN 46, VIEs were generally consolidated by anenterprise when the enterprise had a controlling financial interest throughownership of a majority of voting interest in the entity.  Under FIN 46, aVIE should be consolidated by its primary beneficiary.  The Companyimplemented FIN 46 during the fourth quarter of 2003.  Because Trinity isnot the primary beneficiary of the Trusts, the financial statements of theTrusts are no longer included in the consolidated financial statements of theCompany.  The Company’s prior financial statements have been reclassifiedto de-consolidate the Company’s investment in the Trusts.

In March 2005, the Board of Governors of theFederal Reserve System issued a final rule allowing bank holding companiesto continue to include qualifying trust preferred securities in their Tier 1Capital for regulatory capital purposes, subject to a 25% limitation to allcore (Tier I) capital elements, net of goodwill less any associated deferredtax liability.  The final rule provides a five-year transitionperiod, ending March 31, 2009, for application of the aforementionedquantitative limitation.  As of June 30, 2006, 82.3% of the trustpreferred securities noted in the table above qualified as Tier I capital and17.7% qualified as Tier 2 capital under the final rule adopted inMarch 2005.

Payments of distributions on the trust preferredsecurities and payments on redemption of the trust preferred securities areguaranteed by the Company on a limited basis.  The Company also enteredinto an agreement as to expenses and liabilities with the Trusts pursuant towhich it agreed, on a subordinated basis, to pay any costs, expenses orliabilities of the Trusts other than those arising under the trust preferredsecurities.  The obligations of the Company under the junior subordinateddebentures, the related indenture, the trust agreement establishing the Trusts,the guarantee and the agreement as to expenses and liabilities, in theaggregate, constitute a full and unconditional guarantee by the Company of theTrusts’ obligations under the trust preferred securities.

8

----

Issuance costs of $615 thousand related to the firstthree trust preferred securities issues were deferred and are being amortizedover the period until mandatory redemption of the securities inMarch 2030, December 2031 and September 2034,respectively.  During each of the three month periods ended June 30,2006 and 2005, $5 thousand of these issuance costs were amortized.  Duringeach of the six month periods ended June 30, 2006 and 2005, $10 thousandof these issuance costs were amortized.  Unamortized issuance costs were$513 thousand and $519 thousand at June 30, 2006 and December 31,2005, respectively.  There were no issuance costs associated with thefourth trust preferred security issue.

Dividends accrued and unpaid to securities holderstotaled $369 thousand and $418 thousand on June 30, 2006 and 2005,respectively.

**Note 9.  Commitments,Contingencies and Off-Balance Sheet Activities**

*Credit-relatedfinancial instruments:*  The Company is a party tocredit-related commitments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  Thesecredit-related commitments include commitments to extend credit, standbyletters of credit and commercial letters of credit.  Such credit-relatedcommitments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is representedby the contractual amount of these credit-related commitments.  TheCompany follows the same credit policies in making credit-related commitmentsas it does for on-balance-sheet instruments.

At June 30, 2006 and December 31, 2005, thefollowing credit-related commitments were outstanding whose contract amountsrepresent credit risk:

|                                             | ** ** | **Contract Amount**    | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **June 30, 2006** | ** ** | **December  31, 2005** | ** ** |
| ** **                                  | ** ** | **(In thousands)**     | ** ** |
| Unfunded  commitments under lines of credit |       | $                           | 207,732    |   | $ | 182,641 |   |
| Commercial and  standby letters of credit   |       | 33,676                      |       | 37,436 |   |
|                                        |       |                        |       |   |   |
|                                             |            |                             |            |  |  |  |  |

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally have fixed expiration dates or othertermination clauses and may require a payment of a fee.  The commitmentsfor equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent futurecash requirements.  The amount of collateral obtained, if it is deemednecessary by the Company, is based on management’s credit evaluation of thecustomer.  Unfunded commitments under commercial lines of credit,revolving credit lines and overdraft protection agreements are commitments forpossible future extensions of credit to existing customers.  Overdraftprotection agreements are uncollateralized, but most other unfunded commitmentshave collateral.  These overdraft protection unfunded lines of creditusually do not contain a specified maturity date and may not necessarily bedrawn upon to the total extent to which the Company is committed.

Commercial and standby letters of credit areconditional credit-related commitments issued by the Company to guarantee theperformance by the customer to a third party.  Those letters of credit areprimarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.The credit risk involved in issuing letters of credit is the same as thatinvolved in extending loans to customers.  The Company generally holdscollateral supporting those credit-related commitments. In the event thecustomer does not perform in accordance with the terms of the agreement withthe third party, the Company would be required to fund the credit-relatedcommitment.  The maximum potential amount of future payments the Companycould be required to make is represented by the contractual amount shown in thesummary above.  If the credit-related commitment is funded, the Companywould be entitled to seek recovery from the customer.  At June 30, 2006and December 31, 2005, no amounts have been recorded as liabilities forthe Company’s potential obligations under these credit-relatedcommitments.  The fair value of these credit-related commitments isapproximately equal to the fees collected when granting these letters ofcredit.  These fees collected were $111 thousand and $33 thousand as ofJune 30, 2006 and December 31, 2005, respectively, and are includedin “other liabilities” on the Company’s balance sheets.

*Concentrationsof credit risk:*  The majority of the loans, commitmentsto extend credit, and standby letters of credit have been granted to customersin Los Alamos and surrounding communities.  Although the Company has adiversified loan portfolio, a substantial portion of its loans are made tobusinesses and individuals associated with, or employed by, Los Alamos NationalLaboratory (“the Laboratory”).  The ability of such borrowers to honortheir contracts is predominately dependent upon the continued operation andfunding of the Laboratory.  Investments in securities issued by states andpolitical subdivisions involve governmental entities within the State of NewMexico.  The distribution of types of commitments to extend creditapproximates the distribution of loans outstanding.  Standby letters ofcredit were granted primarily to commercial borrowers.

9

----

*Contingencies:* In the normal course of business, the Company is involved in various legalproceedings.  In the opinion of management, after consulting with counsel,probable liabilities resulting from such proceedings would not have a materialadverse effect on the Company’s consolidated financial statements.

**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

*This discussionis intended to focus on certain financial information regarding the Company andits subsidiaries and is written to provide the reader with a more thoroughunderstanding of its financial statements. The following discussion andanalysis of the Company’s financial position and results of operations shouldbe read in conjunction with the information set forth in Item 3,Quantitative and Qualitative Disclosures about Market Risk and the annualaudited consolidated financial statements filed on Form 10-K, as amended.*

**Special Note Concerning Forward-Looking Statements**

This document (includinginformation incorporated by reference) contains, and future oral and writtenstatements of the Company and its management may contain, forward-lookingstatements, within the meaning of such term in the Private SecuritiesLitigation Reform Act of 1995, with respect to the financial condition, resultsof operations, plans, objectives, future performance and business of theCompany. Forward-looking statements, which may be based upon beliefs, expectationsand assumptions of the Company’s management and on information currentlyavailable to management, are generally identifiable by the use of words such as“believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,”“would,” “could,” “should” or other similar expressions. Additionally, allstatements in this document, including forward-looking statements, speak onlyas of the date they are made, and the Company undertakes no obligation toupdate any statement in light of new information or future events.

Ourability to predict results or the actual effect of future plans or strategiesis inherently uncertain. The factors, which could have a material adverseeffect on our operations and future prospects are detailed in the “Risk Factors”section included under Item 1a. of Part I of our Form 10-K. In addition to therisk factors described in that section, there are other factors that may impactany public company, including ours, which could have a material adverse effecton our operations and future prospects. These risks and uncertainties should beconsidered in evaluating forward-looking statements and undue reliance shouldnot be placed on such statements.

**Critical Accounting Policies**

***Allowance for LoanLosses:***  Management believes the allowance for loanlosses accounting policy is critical to the portrayal and understanding of ourfinancial condition and results of operations. As such, selection andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

The allowance for loan losses is maintained at anamount that management believes will be adequate to absorb probable losses onexisting loans, based on an evaluation of the collectibility of loans in ourportfolio and prior loss experience. Three methods are used to evaluate theadequacy of the allowance for loan losses: (1) historical loss experience,based on loss experience by quality classification in the previous twelvecalendar quarters; (2) specific identification, based upon management’sassessment of loans in our portfolio and the probability that a charge off willoccur in the upcoming quarter; and (3) loan concentrations, based oncurrent or expected economic factors in the geographic and industry sectorswhere management believes we may eventually experience some loan losses. Thisevaluation also takes into consideration such factors as changes in the natureand volume of the loan portfolio, growth of the loan portfolio, the value ofunderlying collateral, overall portfolio quality, review of specific problemloans, and current economic conditions that may affect the borrower’s abilityto pay.

While management uses the best information availableto make its evaluation, future adjustments to the allowance may be necessary ifthere are significant changes in economic conditions. Management is in theprocess of analyzing the methodology used in determining the allowance for loanlosses which may result in future changes to the Company’s calculations andaccruals. In addition, as an integral part of their examination processregulatory agencies periodically review our allowance for loan losses and mayrequire us to make additions to the allowance based on their evaluation ofinformation available at the time of their examinations.

 

10

----

***Mortgage ServicingRight (MSR) Assets:***  Servicing residential mortgageloans for third-party investors represents a significant business activity ofthe Bank. As of June 30, 2006, mortgage loans serviced for others totaled$952.3 million. The MSRs on these loans total $9.6 million as of June 30, 2006.The expected and actual rates of mortgage loan prepayments are the mostsignificant factors driving the value of MSRs. Increases in mortgage loanprepayments reduce estimated future net servicing cash flows because the lifeof the underlying loan is reduced. In determining the fair value of the MSRs,mortgage interest rates, which are used to determine prepayment rates anddiscount rates are held constant over the estimated life of the portfolio. Fairvalues of the MSRs are provided by an independent third-party broker of MSRs ona monthly basis. The values given by the broker are based upon current marketconditions and assumptions, which incorporate the expected life of the loans,estimated costs to service the loans, servicing fees to be received and otherfactors. MSRs are carried at the lower of the initial capitalized amount, netof accumulated amortization, or fair value.

The fair value of the MSRs is driven primarily by the effect current mortgage interest rates have on the likelihood borrowers will prepay the underlying mortgages by refinancing at a lower rate.  Accordingly, higher interest rates decrease the likelihood of repayment, extending the life of the MSRs and increasing the value of these assets.  Lower interest rates increase the likelihood of repayment, contracting the life of the MSRs and decreasing the value of these assets.  This can have a significant impact on our income.  There is no certainty on the direction and amount of interest rate changes looking forward, and therefore, there is no certainty on the amount or direction of the change in valuation.

An analysis of changes inmortgage servicing rights asset follows:
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30**                 | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at beginning of  period              |       | $                                | 10,652     |                           | $          | 11,552 |   | $ | 11,009 |   | $ | 11,859 |   |
| Servicing rights  originated and capitalized |       | 490                              |       | 468                            |       | 807 |   | 855 |   |
| Amortization                                 |       | (682                             | )          | (686                           | )          | (1,356 | ) | (1,380 | ) |
|                                         |       | $                                | 10,460     |                           | $          | 11,334 |   | $ | 10,460 |   | $ | 11,334 |   |

 

Below is an analysis of changesin the mortgage servicing right asset valuation allowance:
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at  beginning of period              |       | $                                | (1,107     | )                              | $          | (2,923 | ) | $ | (1,230 | ) | $ | (3,488 | ) |
| Aggregate  reductions credited to operations |       | 211                              |       | 541                            |       | 334 |   | 1,185 |   |
| Aggregate  additions charged to operations   |       | —                           |       | (790                           | )          | — |   | (869 | ) |
|                                         |       | $                                | (896       | )                              | $          | (3,172 | ) | $ | (896 | ) | $ | (3,172 | ) |

 

The fair values of the MSRs were$11.4 million, $10.5 million and $8.4 million on June 30, 2006, December 31,2005 and June 30, 2005, respectively.

The primary risk characteristics of the underlyingloans used to stratify the servicing assets for the purposes of measuringimpairment are interest rate and original term.

Our valuation allowance is used to recognizeimpairments of our MSRs.  An MSR isconsidered impaired when the market value of the MSR is below the amortizedbook value of the MSR.  The MSRs areaccounted by risk tranche, with the interest rate and term of the underlyingloan being the primary strata used in distinguishing the tranches.  Each tranche is evaluated separately forimpairment.

We have an independent third party analyze our MSRsfor impairment on a monthly basis.  Thisindependent third party analyzes the underlying loans on all serviced loansand, based upon their knowledge of the value of MSRs that are traded on theopen market, they assign a current market value for each risk tranche in ourportfolio.  We then compare that marketvalue to the current amortized book value for each tranche.  The change in market value (up to theamortized value of the MSR) is recorded as an adjustment to the MSR valuationallowance, with the offset being recorded as an addition or a reduction toincome.

11

----

The independent third party usedthe following assumptions to calculate the market value of the MSRs as of June30, 2006, December 31, 2005 and June 30, 2005:
| ** **                                  | ** ** | **At June 30, 2006** | ** ** | **At December 31,  2005** | ** ** | **At June 30, 2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **                          | ** ** |
| Prepayment  Standard Assumption (PSA) speed |       | 136.00                              | %          | 165.00                              | %          | 256.00                              | %          |
| Discount rate                               |       | 10.01                               |       | 9.01                                |       | 9.03                                |       |
| Earnings rate                               |       | 5.00                                |       | 4.00                                |       | 4.00                                |       |

 

**Overview**

The Company’s net income substantially increased fromthe first quarter of 2006 to the second quarter of 2006.  Net incomeincreased $1.2 million (59.1%) in the second quarter of 2006 compared to thefirst quarter of 2006.  The Company’s net income also increased $901thousand (36.9%) from the second quarter of 2005 to the second quarter of2006.  This increase was primarily due to an increase in net interestincome.  While growth on the Company’s balance sheet during the first sixmonths of 2006 was minimal, with total assets growing $27.4 million (2.2%) fromDecember 31, 2005 to June 30, 2006, net income for the six months endedJune 30, 2006 increased by $634 thousand (13.2%) over the same period in2005.  This increase was primarily due to an increase in net interestincome due to strong growth in earning assets from June 30, 2005 to June 30,2006, which was partially offset by increases in the provision for loan lossexpense and other expenses.

**Income Statement Analysis**

***Net Income-General.***  Net incomefor the three months ended June 30, 2006 was $3.3 million, compared to $2.4million for the same period of 2005.  Diluted earnings per share increasedby $0.14 to $0.50 for the three months ended June 30, 2006 from $0.36 for thesame period of 2005.  This represented an increase in diluted earnings pershare of 38.9%.  The increase in net income was primarily due to anincrease in net interest income (not on a fully tax equivalent basis) of $1.6million.  In addition, non-interestincome increased $210 thousand. These increases were partially offset byincreases in our provision for loan losses of $75 thousand and non-interestexpense of $40 thousand.  Income taxexpenses also increased $784 thousand due to higher pre-tax income.

Net income for the six months ended June 30, 2006was $5.4 million, compared to $4.8 million for the same period of 2005. Diluted earnings per share increased by $0.11 to $0.82 for the six months endedJune 30, 2006 from $0.71 for the same period of 2005.  This represented anincrease in diluted earnings per share of 15.5%.  The increase in netincome was primarily the result of an increase in net interest income (not on afully tax equivalent basis) of $2.8 million. This was partially offset by an increase in the provision for loanlosses of $1.5 million.  This additionalprovision was largely due to a provision associated with a single loan to acommercial borrower.  In addition,non-interest expense increased by $775 thousand and non-interest incomeincreased $546 thousand.  Income tax expensesincreased $524 thousand for the six months ended June 30, 2006 due to higherpre-tax income.

The profitability of the Company’s operations dependsprimarily on its net interest income, which is the difference between totalinterest earned on interest-earning assets and total interest paid oninterest-bearing liabilities. The Company’s net income is affected by itsprovision for loan losses as well as other income and other expenses. Theprovision for loan losses reflects the amount thought to be adequate to coverprobable credit losses in the loan portfolio. Non-interest income or otherincome consists of mortgage loan servicing fees, loan and other fees, servicecharges on deposits, gain on sale of loans, gain on sale of securities andother operating income. Other expenses include salaries and employee benefits,occupancy expenses, data processing expenses, marketing, amortization andvaluation of mortgage servicing rights, supplies expense and other expenses.

The amount of net interest income is affected bychanges in the volume and mix of interest-earning assets, the level of interestrates earned on those assets, the volume and mix of interest-bearingliabilities, and the level of interest rates paid on those interest-bearingliabilities. The provision for loan losses is dependent on changes in the loanportfolio and management’s assessment of the collectibility of the loanportfolio, as well as economic and market conditions. Other income and otherexpenses are impacted by growth of operations and growth in the number ofaccounts through core banking business growth.  Growth in operationsaffects other expenses as a result of additional employees, branch facilitiesand promotional marketing expense. Growth in the number of accounts affectsother income including service fees as well as other expenses such as computerservices, supplies, loss (gain) on sale of other real estate owned, postage,telecommunications and other miscellaneous expenses.

12

----

***Net Interest Income.***  Thefollowing tables present, for the periods indicated, the total dollar amount ofinterest income from average interest-earning assets and the resultant yields,as well as the interest expense on average interest-bearing liabilities, andthe resultant costs, expressed both in dollars and rates:
| ** **                                                                   | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **Average**                                         | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | **Balance**                                         | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**                | ** ** |
| **Interest-Earning  Assets:**                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                  |       | $                                                   | 1,080,807  |   | $ | 19,712 |   | 7.32 | % | $ | 971,070 |   | $ | 15,475 |   | 6.39 | % |
| Taxable  investment securities                                               |       | 89,194                                              |       | 909 |   | 4.09 |   | 78,294 |   | 574 |   | 2.94 |   |
| Investment  securities exempt from federal income taxes(3)                   |       | 18,818                                              |       | 317 |   | 6.76 |   | 17,220 |   | 265 |   | 6.17 |   |
| Federal funds  sold                                                          |       | 132                                                 |       | 2 |   | 6.08 |   | 1,150 |   | 4 |   | 1.40 |   |
| Other interest  bearing deposits                                             |       | 1,682                                               |       | 21 |   | 5.01 |   | 10,779 |   | 79 |   | 2.94 |   |
| Investment in unconsolidated  trust subsidiaries                             |       | 992                                                 |       | 22 |   | 8.90 |   | 689 |   | 15 |   | 8.73 |   |
| Total interest-earning assets                                                |       | 1,191,625                                           |       | 20,983 |   | 7.06 |   | 1,079,202 |   | 16,412 |   | 6.10 |   |
| Non-interest-earning assets                                                  |       | 59,615                                              |       |   |   |   |   | 63,816 |   |   |   |   |   |
| Total assets                                                                 |       | $                                                   | 1,251,240  |   |   |   |   |   | $ | 1,143,018 |   |   |   |   |   |
| **Interest-Bearing  Liabilities:**                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposits                                                |       | $                                                   | 92,719     |   | $ | 481 |   | 2.08 | % | $ | 82,398 |   | $ | 196 |   | 0.95 | % |
| Savings deposits                                                             |       | 412,367                                             |       | 2,145 |   | 2.09 |   | 374,504 |   | 1,445 |   | 1.55 |   |
| Time deposits                                                                |       | 452,450                                             |       | 4,822 |   | 4.27 |   | 404,402 |   | 3,120 |   | 3.09 |   |
| Short-term  borrowings                                                       |       | 27,224                                              |       | 281 |   | 4.14 |   | 2,508 |   | 21 |   | 3.36 |   |
| Long-term  borrowings, including ESOP borrowings                             |       | 63,280                                              |       | 628 |   | 3.98 |   | 84,466 |   | 826 |   | 3.92 |   |
| Junior  subordinated debt owed to unconsolidated trusts                      |       | 32,992                                              |       | 736 |   | 8.95 |   | 22,909 |   | 536 |   | 9.38 |   |
| Total interest-bearing liabilities                                           |       | 1,081,032                                           |       | 9,093 |   | 3.37 |   | 971,187 |   | 6,144 |   | 2.54 |   |
| Demand  deposits—non-interest-bearing                                   |       | 40,735                                              |       |   |   |   |   | 28,107 |   |   |   |   |   |
| Other  non-interest-bearing liabilities                                      |       | 49,948                                              |       |   |   |   |   | 70,483 |   |   |   |   |   |
| Stockholders’  equity, including stock owned by ESOP                    |       | 79,525                                              |       |   |   |   |   | 73,241 |   |   |   |   |   |
| Total liabilities and stockholders equity                                    |       | $                                                   | 1,251,240  |   |   |   |   |   | $ | 1,143,018 |   |   |   |   |   |
| Net interest income on a fully tax equivalent  basis/interest rate spread(4) |       |                                                |       | $ | 11,890 |   | 3.69 | % |   |   | $ | 10,268 |   | 3.56 | % |
| Net interest margin on a fully tax equivalent  basis(5)                      |       |                                                |       |   |   | 4.00 | % |   |   |   |   | 3.82 | % |
| Net interest  margin(5)                                                      |       |                                                |       |   |   | 3.96 | % |   |   |   |   | 3.78 | % |

----

(1)             Includesnon-accrual loans of $8.1 million and $5.4 million for June 30, 2006 and 2005respectively.

(2)             Interest income includes loanorigination fees of $1.1 million and $806 thousand for the three months endedJune 30, 2006 and 2005, respectively.

(3)             Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanent taxdifferences.

(4)             Interestrate spread represents the difference between the average yield oninterest-earning assets and the average cost of interest-bearing liabilitiesand is presented on a fully tax equivalent basis.

(5)             Netinterest margin represents net interest income as a percentage of averageinterest-earning assets.

 

13

----

For the second quarter of 2006, net interest income ona fully tax equivalent basis increased $1.6 million (15.8%) to $11.9 millionfrom $10.3 million for the second quarter of 2005.  The increase in netinterest income resulted from an increase in interest income on a fully taxequivalent basis of $4.6 million (27.9%), which was partially offset by anincrease in interest expense of $2.9 million (48.0%).  Interest incomeincreased mainly due to an increase in rate on earning assets of 96 basis points,which accounted for an increase of $2.7 million in interest income on a fullytax equivalent basis.  There was also an increase in averageinterest-earning assets of $112.4 million (10.4%), which accounted for anincrease in interest income on a fully tax equivalent basis of $1.9 million. Interest expense increased mainly due to an increase in the cost ofinterest-bearing liabilities of 83 basis points, which accounted for $2.1million of the increase.  In addition, total interest-bearing liabilitiesincreased $109.8 million (11.3%), accounting for $859 thousand of the increasein interest expense.  The net interest margin expressed on a fully taxequivalent basis increased 18 basis points to 4.00% for the quarter ended June30, 2006 from 3.82% for the quarter ended June 30, 2005.
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **Average**                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | **Balance**                                       | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**              | ** ** |
| **Interest-Earning Assets:**                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                  |       | $                                                 | 1,059,365  |   | $ | 37,615 |   | 7.16 | % | $ | 946,393 |   | $ | 29,697 |   | 6.33 | % |
| Taxable investment securities                                                |       | 94,748                                            |       | 1,900 |   | 4.04 |   | 83,870 |   | 1,230 |   | 2.96 |   |
| Investment securities exempt from federal income taxes(3)                    |       | 18,853                                            |       | 641 |   | 6.86 |   | 17,254 |   | 546 |   | 6.38 |   |
| Federal funds sold                                                           |       | 257                                               |       | 5 |   | 3.92 |   | 931 |   | 8 |   | 1.73 |   |
| Other interest bearing deposits                                              |       | 7,061                                             |       | 153 |   | 4.37 |   | 7,218 |   | 99 |   | 2.77 |   |
| Investment in unconsolidated trust subsidiaries                              |       | 992                                               |       | 44 |   | 8.94 |   | 685 |   | 31 |   | 9.13 |   |
| Total interest-earning  assets                                               |       | 1,181,276                                         |       | 40,358 |   | 6.89 |   | 1,056,351 |   | 31,611 |   | 6.03 |   |
| Non-interest-earning  assets                                                 |       | 59,696                                            |       |   |   |   |   | 66,744 |   |   |   |   |   |
| Total assets                                                                 |       | $                                                 | 1,240,972  |   |   |   |   |   | $ | 1,123,095 |   |   |   |   |   |
| **Interest-Bearing Liabilities:**                                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market  deposits                                               |       | $                                                 | 88,768     |   | $ | 843 |   | 1.92 | % | $ | 103,341 |   | $ | 522 |   | 1.02 | % |
| Savings deposits                                                             |       | 409,901                                           |       | 3,885 |   | 1.91 |   | 374,384 |   | 2,490 |   | 1.34 |   |
| Time deposits                                                                |       | 453,738                                           |       | 9,262 |   | 4.12 |   | 391,376 |   | 5,730 |   | 2.95 |   |
| Short-term borrowings                                                        |       | 20,530                                            |       | 419 |   | 4.12 |   | 9,251 |   | 123 |   | 2.68 |   |
| Long-term borrowings, including ESOP borrowings                              |       | 66,392                                            |       | 1,308 |   | 3.97 |   | 73,751 |   | 1,403 |   | 3.84 |   |
| Junior subordinated debt owed to unconsolidated trusts                       |       | 32,992                                            |       | 1,464 |   | 8.95 |   | 22,796 |   | 1,055 |   | 9.33 |   |
| Total interest-bearing  liabilities                                          |       | 1,072,321                                         |       | 17,181 |   | 3.23 |   | 974,899 |   | 11,323 |   | 2.34 |   |
| Demand deposits—non-interest-bearing                                    |       | 40,275                                            |       |   |   |   |   | 36,981 |   |   |   |   |   |
| Other non-interest-bearing liabilities                                       |       | 49,714                                            |       |   |   |   |   | 38,404 |   |   |   |   |   |
| Stockholders’ equity, including stock owned by ESOP                     |       | 78,662                                            |       |   |   |   |   | 72,811 |   |   |   |   |   |
| Total liabilities and  stockholders equity                                   |       | $                                                 | 1,240,972  |   |   |   |   |   | $ | 1,123,095 |   |   |   |   |   |
| Net interest income on  a fully tax equivalent basis/interest rate spread(4) |       |                                              |       | $ | 23,177 |   | 3.66 | % |   |   | $ | 20,288 |   | 3.69 | % |
| Net interest margin on  a fully tax equivalent basis(5)                      |       |                                              |       |   |   | 3.96 | % |   |   |   |   | 3.87 | % |
| Net interest margin(5)                                                       |       |                                              |       |   |   | 3.92 | % |   |   |   |   | 3.84 | % |

----

(1)             Includes non-accrualloans of $8.1 million and $5.4 million for June 30, 2006 and 2005 respectively.

(2)             Interest income includes loanorigination fees of $1.8 million and $1.5 million for the six months ended June30, 2006 and 2005, respectively.

(3)             Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanent taxdifferences.

(4)             Interest rate spreadrepresents the difference between the average yield on interest-earning assetsand the average cost of interest-bearing liabilities and is presented on afully tax equivalent basis.

(5)             Netinterest margin represents net interest income as a percentage of averageinterest-earning assets.

 

14

----

For the six months ended June 30, 2006, netinterest income on a fully tax equivalent basis increased $2.9 million (14.2%)to $23.2 million from $20.3 million for the six months ended June 30,2005.  The increase in net interest income resulted from an increase ininterest income on a fully tax equivalent basis of $8.7 million (27.7%), whichwas partially offset by an increase in interest expense of $5.9 million(51.7%).  The increase in interest income on a fully tax equivalent basiswas mainly due to an increase on the yield of interest earning assets of 86basis points, which increased interest income on a fully tax equivalent basisby $4.7 million.  There was also an increase in average interest earningassets of $124.9 million (11.8%), which accounted for $4.0 million of theincrease.  The increase in interestexpense was due to an increase in the yield on interest bearing liabilities of89 basis points, which accounted for an increase in interest expense of $4.2 million.In addition, average interest-bearing liabilities increased a total of $97.4million (10.0%), which increased interest expense by $1.7 million.  Thenet interest margin expressed on a fully tax equivalent basis increased 9 basispoints to 3.96% for the six month period ended June 30, 2006 from 3.87% for thesame period in 2005.

***Volume, Mix and Rate Analysis of Net Interest Income.*** The following tables present the extent to which changes in volume, changes ininterest rates, and changes in the interest rates times the changes in volumeof interest earning assets and interest bearing liabilities have affected ourinterest income and interest expense during the periods indicated. Informationis provided on changes in each category due to (i) changes attributable tochanges in volume (change in volume times the prior period interest rate),(ii) changes attributable to changes in interest rate (changes in ratetimes the prior period volume) and (iii) changes attributable to changesin rate/volume (changes in interest rate times changes in volume). Changes attributable to the combined impact of volume and rate have beenallocated proportionally to the changes due to volume and the changes due torate.
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006 Compared to 2005**            | ** ** | **2006 Compared to 2005**          | ** ** |
| ** **                                                 | ** ** | **Change Due  to Volume**                 | ** ** | **Change Due  to Rate**                 | ** ** | **Total  Change** | ** ** | **Change Due  to Volume** | ** ** | **Change Due  to Rate** | ** ** | **Total  Change** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                             | ** ** |
| **Interest Earning Assets:**                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Loans                                                      |       | $                                                   | 1,860      |                                              | $          | 2,377 |   | $ | 4,237 |   | $ | 3,767 |   | $ | 4,151 |   | $ | 7,918 |   |
| Taxable investment  securities                             |       | 88                                                  |       | 247                                               |       | 335 |   | 175 |   | 495 |   | 670 |   |
| Investment securities  exempt from federal income taxes(1) |       | 26                                                  |       | 26                                                |       | 52 |   | 52 |   | 43 |   | 95 |   |
| Federal funds sold                                         |       | (6                                                  | )          | 4                                                 |       | (2 | ) | (9 | ) | 6 |   | (3 | ) |
| Other interest bearing  deposits                           |       | (93                                                 | )          | 35                                                |       | (58 | ) | (2 | ) | 56 |   | 54 |   |
| Investment in  unconsolidated trust subsidiaries           |       | 8                                                   |       | (1                                                | )          | 7 |   | 14 |   | (1 | ) | 13 |   |
| Total increase  (decrease) in interest income              |       | 1,883                                               |       | 2,688                                             |       | 4,571 |   | 3,997 |   | 4,750 |   | 8,747 |   |
| **Interest Bearing Liabilities:**                          |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| NOW and money market  deposit accounts                     |       | $                                                   | 28         |                                              | $          | 257 |   | $ | 285 |   | $ | (83 | ) | $ | 404 |   | $ | 321 |   |
| Savings deposits                                           |       | 157                                                 |       | 543                                               |       | 700 |   | 254 |   | 1,141 |   | 1,395 |   |
| Time deposits                                              |       | 404                                                 |       | 1,298                                             |       | 1,702 |   | 1,017 |   | 2,515 |   | 3,532 |   |
| Short-term borrowings                                      |       | 254                                                 |       | 6                                                 |       | 260 |   | 205 |   | 91 |   | 296 |   |
| Long-term borrowings                                       |       | (210                                                | )          | 12                                                |       | (198 | ) | (144 | ) | 49 |   | (95 | ) |
| Junior subordinated  debt owed to unconsolidated trusts    |       | 226                                                 |       | (26                                               | )          | 200 |   | 454 |   | (45 | ) | 409 |   |
| Total increase  (decrease) in interest expense             |       | 859                                                 |       | 2,090                                             |       | 2,949 |   | 1,703 |   | 4,155 |   | 5,858 |   |
| Increase (decrease) in  net interest income                |       | $                                                   | 1,024      |                                              | $          | 598 |   | $ | 1,622 |   | $ | 2,294 |   | $ | 595 |   | $ | 2,889 |   |

----

(1)             Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanentincome tax differences.

 

15

----

***Other Income.***  Changes in otherincome between the three months ended June 30, 2006 and 2005, and betweenthe six months ended June 30, 2006 and 2005, were as follows:
| ** **                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                    | ** ** | **June 30,**                | ** ** | **Net**    | ** ** | **June 30,**              | ** ** | **Net**    | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **difference**                 | ** ** | **2006**   | ** ** | **2005** | ** ** | **difference** | ** ** |
| ** **                    | ** ** | **(In thousands)**          | ** ** |
| Other income:                 |       |                             |       |       |       |                           |       |       |       |   |   |   |   |
| Mortgage loan  servicing fees |       | $                                | 667        |       | $          | 659                            |       | $          | 8          |   | $ | 1,307 |   | $ | 1,261 |   | $ | 46 |   |
| Loan and other  fees          |       | 812                              |       | 709        |       | 103                            |       | 1,521      |       | 1,297 |   | 224 |   |
| Service charges  on deposits  |       | 397                              |       | 368        |       | 29                             |       | 778        |       | 699 |   | 79 |   |
| Gain on sale of  loans        |       | 591                              |       | 638        |       | (47                            | )          | 891        |       | 1,101 |   | (210 | ) |
| Other operating  income       |       | 436                              |       | 319        |       | 117                            |       | 802        |       | 395 |   | 407 |   |
|                          |       | $                                | 2,903      |       | $          | 2,693                          |       | $          | 210        |   | $ | 5,299 |   | $ | 4,753 |   | $ | 546 |   |

 

In the second quarter of 2006, other income increasedby $210 thousand (7.8%) to $2.9 million from $2.7 million in the second quarterof 2005.  Income generated from TCCAppraisal in the second quarter of 2006 was $93 thousand and, as it had not yetbeen established, TCC Appraisal did not generate any income in the second quarterof 2005.  Loan and other fees increased$103 thousand (14.5%) from the second quarter of 2005 to the second quarter of2006, mainly due to an increase in bankcard fees of $56 thousand (25.6%) and anincrease in ATM switch fees of $32 thousand (15.5%).

In the first six months of 2006, other incomeincreased by $546 thousand (11.5%) to $5.3 million from $4.8 million in thefirst six months of 2005.  Income generated from TCC Appraisal in thefirst six months of 2006 was $148 thousand and, as it had not yet beenestablished, TCC Appraisal did not generate any income in the first six monthsof 2005.  Income from title insurancepremiums increased $146 thousand (28.9%) from the first six months of 2005 tothe first six months of 2006.  Net (loss)on sale of premises and equipment (included in “Other operating income” above)decreased $129 thousand (90.9%) due to a lower amount of equipment disposals in2006 compared to 2005.  Loan and otherfees increased $224 thousand (17.3%) in 2006, mainly due to an increase inbankcard fees of $80 thousand (20.8%), an increase in trust fees of $69thousand (16.1%) and an increase in ATM switch fees of $61 thousand(15.8%).  The gain on sale of loansdecreased $210 thousand (19.1%) due to a lower volume of loans sold and a lowerpremium made on the sale of each loan.

***Other Expenses.***  Changes in otherexpenses between the three months ended June 30, 2006 and 2005 and the sixmonths ended June 30, 2006 and 2005 were as follows:
| ** **                                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** ** | **Net**    | ** ** | **June 30,**              | ** ** | **Net**    | ** ** |
| ** **                                               | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **difference**                 | ** ** | **2006**   | ** ** | **2005** | ** ** | **difference** | ** ** |
| ** **                                               | ** ** | **(In thousands)**          | ** ** |
| Other expenses:                                          |       |                             |       |       |       |                           |       |       |       |   |   |   |   |
| Salaries and employee benefits                           |       | $                                | 4,423      |       | $          | 3,963                          |       | $          | 460        |   | $ | 8,848 |   | $ | 8,021 |   | $ | 827 |   |
| Occupancy                                                |       | 828                              |       | 794        |       | 34                             |       | 1,685      |       | 1,593 |   | 92 |   |
| Data processing                                          |       | 427                              |       | 415        |       | 12                             |       | 895        |       | 905 |   | (10 | ) |
| Marketing                                                |       | 504                              |       | 406        |       | 98                             |       | 941        |       | 730 |   | 211 |   |
| Amortization and valuation of mortgage servicing  rights |       | 471                              |       | 934        |       | (463                           | )          | 1,022      |       | 1,064 |   | (42 | ) |
| Supplies                                                 |       | 149                              |       | 191        |       | (42                            | )          | 350        |       | 400 |   | (50 | ) |
| Loss (gain) on sale of other real estate owned           |       | 34                               |       | 308        |       | (274                           | )          | 232        |       | 827 |   | (595 | ) |
| Postage                                                  |       | 146                              |       | 140        |       | 6                              |       | 303        |       | 310 |   | (7 | ) |
| Other                                                    |       | 1,351                            |       | 1,142      |       | 209                            |       | 2,450      |       | 2,101 |   | 349 |   |
|                                                     |       | $                                | 8,333      |       | $          | 8,293                          |       | $          | 40         |   | $ | 16,726 |   | $ | 15,951 |   | $ | 775 |   |

 

16

----

For the second quarter of 2006, other expenses changedlittle from the prior year, increasing $40 thousand (0.5%) from the secondquarter of 2005.  Amortization and valuation of mortgage servicing rightsdecreased $463 thousand (49.6%), mainly due to a decrease in the valuationallowance in the second quarter of 2006 compared to the second quarter of 2005,due to higher interest rates.  Salariesand employee benefits increased $460 thousand (11.6%), mainly due to anincrease in the number of employees and an increase in compensation peremployee.  Loss on sale of other realestate owned decreased $274 thousand (89.0%) due to one-time large write-downsof other real estate owned in 2005 that were not repeated in 2006.  Marketing expenses increased $98 thousand(24.1%), mainly due to an increase in advertising expense related to a newadvertising campaign for the Bank.  Itemsin the “Other” category in the table above also increased: debit and creditcard interchange fees increased $98 thousand (60.1%); collection and creditfees paid increased $42 thousand (35.5%) in the second quarter of 2006 from thesame period in 2005; and other losses increased $60 thousand (230.8%).

For the six months ended June 30, 2006, otherexpenses increased $775 thousand (4.9%) to $16.7 million from $16.0 million inthe first six months of 2005.  This increase was largely due to anincrease in salaries and employee benefits of $827 thousand (10.3%), mainly dueto an increase in the number of employees and an increase in compensation peremployee.  The effect of adopting SFAS123(R) increased salaries expense by $147 thousand.  Loss on sale of other real estate owneddecreased $595 thousand (71.9%) due to large write-downs of other real estateowned in 2005 that were not repeated in 2006. Marketing expenses increased $211 thousand (28.9%), mainly due to anincrease in advertising expense related to a new advertising campaign for theBank.  Debit and credit card interchangefees increased $135 thousand (39.7%).

***Income Taxes.***  In the secondquarter of 2006, income tax expense increased $784 thousand (59.6%) over thesecond quarter of 2005 to a total of $2.1 million compared to $1.3million.  The effective tax rate increased to 38.6% in the second quarterof 2006 compared to 35.0% in the second quarter of 2005.  The increase was mainly attributable to thetax benefit from the exercise of stock options in the second quarter of 2005(as fewer options were exercised in the second quarter of 2006 than in thesecond quarter of 2005).

In the six months ended June 30, 2006, income taxexpense increased $524 thousand (19.1%), to a total of $3.3 million compared to$2.7 million.  The effective tax rate increased to 37.5% in the first sixmonths of 2006, compared to 36.3% in the first six months of 2005.  Thisincrease was mainly attributable to the tax benefit from the exercise of stockoptions as described above.

***Balance Sheet—General.***  Totalassets at June 30, 2006 were at $1.3 billion, an increase of $27.4 million(2.2%) from December 31, 2005.  Net loans increased $78.3 million(7.7%) during the first six months of 2006. This was partially offset by a decline in cash and cash equivalents of$25.5 million (46.5%) and a decline in investments of $23.2 million(18.4%).  During the same period, total liabilities increased by $24.0million (2.0%) to remain at $1.2 billion from December 31, 2005 to June 30,2006.  The increase in total liabilities was primarily due to an increasein short- and long-term borrowings of $22.7 million (27.6%).  Stockholders’equity (including stock owned by the Employee Stock Ownership Plan) increased$3.4 million (4.5%) to $79.0 million on June 30, 2006 compared to $75.6 millionon December 31, 2005.

***Investment Securities.***  Theprimary purposes of the investment portfolio are to provide a source ofearnings for the purpose of managing liquidity, to provide collateral to pledgeagainst public deposits and to control interest rate risk. In managing theportfolio, we seek to obtain the objectives of safety of principal, liquidity,diversification and maximized return on funds. For an additional discussionwith respect to these matters, see “Liquidity” and “Capital Resources” underItem 2 and “Asset Liability Management” under Item 3 below.

17

----

The following tables set forth the amortized cost andfair value of our securities by accounting classification category and by typeof security as indicated:
| ** **                                                       | ** ** | **At June 30, 2006** | ** ** | **At December 31, 2005** | ** ** | **At June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **Amortized  Cost**                 | ** ** | **Fair  Value**                         | ** ** | **Amortized  Cost**                 | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**             | ** ** |
| Securities  Available for Sale:                                  |       |                                |       |                                    |       |                                |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $                                   | 73,387     |                                    | $          | 72,650                              |       | $ | 85,687 |   | $ | 85,289 |   | $ | 37,668 |   | $ | 37,283 |   |
| States and political subdivisions                                |       | 5,962                               |       | 5,920                                   |       | 5,984                               |       | 5,937 |   | 2,186 |   | 2,161 |   |
| Equity securities                                                |       | 1                                   |       | 5                                       |       | 1                                   |       | 5 |   | 1 |   | 6 |   |
| Total securities available for sale                              |       | $                                   | 79,350     |                                    | $          | 78,575                              |       | $ | 91,672 |   | $ | 91,231 |   | $ | 39,855 |   | $ | 39,450 |   |
|                                                             |       |                                |       |                                    |       |                                |       |   |   |   |   |   |   |
| Securities Held  to Maturity:                                    |       |                                |       |                                    |       |                                |       |   |   |   |   |   |   |
| U.S. Government agencies                                         |       | $                                   | 2,505      |                                    | $          | 2,500                               |       | $ | 13,687 |   | $ | 13,647 |   | $ | 28,184 |   | $ | 28,149 |   |
| States and political subdivisions                                |       | 12,737                              |       | 12,723                                  |       | 12,925                              |       | 12,918 |   | 14,914 |   | 14,931 |   |
| Total securities held to maturity                                |       | $                                   | 15,242     |                                    | $          | 15,223                              |       | $ | 26,612 |   | $ | 26,565 |   | $ | 43,098 |   | $ | 43,080 |   |
|                                                             |       |                                |       |                                    |       |                                |       |   |   |   |   |   |   |
| Other  securities:                                               |       |                                |       |                                    |       |                                |       |   |   |   |   |   |   |
| Non-marketable equity securities (including FRB and  FHLB stock) |       | $                                   | 7,808      |                                    | $          | 7,808                               |       | $ | 6,973 |   | $ | 6,973 |   | $ | 6,931 |   | $ | 6,931 |   |
| Investment in unconsolidated trusts                              |       | 992                                 |       | 992                                     |       | 992                                 |       | 992 |   | 992 |   | 992 |   |
| Total other  securities                                          |       | $                                   | 8,800      |                                    | $          | 8,800                               |       | $ | 7,965 |   | $ | 7,965 |   | $ | 7,923 |   | $ | 7,923 |   |

 

***Loan Portfolio.***  The followingtables set forth the composition of the loan portfolio:
| ** **                 | ** ** | **At June 30, 2006**  | ** ** | **At December 31, 2005** | ** ** | **At June 30, 2005** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **Amount**                           | ** ** | **Percent**                             | ** ** | **Amount**                          | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                 |       | $                                    | 108,603    |                                    | 9.86       | %                                   | $          | 93,579 |   | 9.16 | % | $ | 95,997 |   | 9.62 | % |
| Commercial real  estate    |       | 395,197                              |       | 35.90                                   |       | 379,884                             |       | 37.19 |   | 397,635 |   | 39.84 |   |
| Residential real  estate   |       | 327,944                              |       | 29.78                                   |       | 313,693                             |       | 30.71 |   | 302,169 |   | 30.28 |   |
| Construction  real estate  |       | 212,329                              |       | 19.28                                   |       | 178,068                             |       | 17.43 |   | 147,694 |   | 14.80 |   |
| Installment and  other     |       | 56,983                               |       | 5.18                                    |       | 56,309                              |       | 5.51 |   | 54,543 |   | 5.46 |   |
| Total loans                |       | 1,101,056                            |       | 100.00                                  |       | 1,021,533                           |       | 100.00 |   | 998,038 |   | 100.00 |   |
| Unearned income            |       | (2,110                               | )          |                                    |       | (2,153                              | )          |   |   | (2,418 | ) |   |   |
| Gross loans                |       | 1,098,946                            |       |                                    |       | 1,019,380                           |       |   |   | 995,620 |   |   |   |
| Allowance for  loan losses |       | (10,116                              | )          |                                    |       | (8,842                              | )          |   |   | (9,364 | ) |   |   |
| Net loans                  |       | $                                    | 1,088,830  |                                    |       |                                | $          | 1,010,538 |   |   |   | $ | 986,256 |   |   |   |

 

Total loans increased $79.5 million (7.8%) to $1.1billion at June 30, 2006 from $1.0 billion at December 31, 2005.  The increase was due primarily to growth inthe Company’s construction and commercial real estate and commercial loanportfolios.  There was a slight shiftfrom commercial real estate to construction real estate loans during thisperiod.

Total loans increased $103.0 million (10.3%) to$1.1 billion at June 30, 2006 from $998.0 million at June 30, 2005.The increase was due primarily to growth in the Company’s residential andconstruction real estate loan portfolios. The percentage levels of thecategories of loans within the portfolio remained relatively constant, with aslight shift from commercial real estate to construction real estate.

 

18

----

***Asset Quality.***  The followingtable sets forth the amounts of non-performing loans and non-performing assetsat the dates indicated:
| ** **                                                    | ** ** | **At June 30, 2006**  | ** ** | **At December 31,  2005** | ** ** | **At June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
| Non-accruing loans                                            |       | $                                    | 7,826      |                                | $          | 8,037                               |       | $ | 12,347 |   |
| Loans 90 days or  more past due, still accruing interest |       | 3                                    |       | —                              |       | —                              |       |
| Total non-performing  loans                                   |       | 7,829                                |       | 8,037                               |       | 12,347                              |       |
| Other real estate owned                                       |       | 290                                  |       | 375                                 |       | 2,654                               |       |
| Other repossessed  assets                                     |       | 56                                   |       | 27                                  |       | 24                                  |       |
| Total non-performing  assets                                  |       | $                                    | 8,175      |                                | $          | 8,439                               |       | $ | 15,025 |   |
|                                                          |       |                                 |       |                                |       |                                |       |
| Total non-performing  loans to total loans                    |       | 0.71                                 | %          | 0.79                                | %          | 1.24                                | %          |
| Allowance for loan  losses to non-performing loans            |       | 129.21                               | %          | 110.02                              | %          | 75.84                               | %          |
| Total non-performing  assets to total assets                  |       | 0.64                                 | %          | 0.68                                | %          | 1.28                                | %          |
|                                                          |       |                                 |       |                                |       |                                |       |

 

At June 30, 2006, total non-performing assetsdecreased $264 thousand (3.1%) to $8.2 million from $8.4 million atDecember 31, 2005 primarily due to decreases in non-accruing loans of $211thousand (2.6%) from a residential mortgage relationship being paid off.

At June 30, 2006, total non-performing assetsdecreased $6.8 million (45.6%) to $8.2 million from $15.0 million at June 30,2005 due to decreases in non-accruing loans of $4.5 million (36.6%) and adecrease in other real estate owned of $2.4 million (89.1%).  The decreasein non-accrual loans was due mainly to a $3.4 million reduction in commercialloans in non-accrual status, resulting from principal reduction payments of$1.9 million and a charge-off of $1.5 million,, and a $2.4 million commercialreal estate loan being paid off completely.  The decrease in other realestate owned was primarily due to the sale of $2.2 million in residential realestate and residential construction property in 2005.

***Allowance forLoan Losses.*** Management believes the allowance forloan losses accounting policy is critical to the portrayal and understanding ofthe Company’s financial condition and results of operations. As such, selectionand application of this “critical accounting policy” involves judgments,estimates, and uncertainties that are susceptible to change. In the event thatdifferent assumptions or conditions were to prevail, and depending upon theseverity of such changes, the possibility of materially different financialcondition or results of operations is a reasonable likelihood.

The allowance for loan losses is maintained at anamount that management believes will be adequate to absorb probable losses onexisting loans, based on an evaluation of the collectibility of loans and priorloss experience. This evaluation also takes into consideration such factors aschanges in the nature and volume of the loan portfolio, the value of underlyingcollateral, overall portfolio quality, review of specific problem loans andcurrent economic conditions that may affect the borrower’s ability to pay.While management uses the best information available to make its evaluation,future adjustments to the allowance may be necessary if there are significantchanges in economic conditions. Currently, the Company is reviewing the methodologyused in determining the allowance for loan losses which may result in futurechanges to the Company’s calculations and accruals. In addition, as an integralpart of their examination process regulatory agencies periodically review theCompany’s allowance for loan losses and may require the Company to makeadditions to the allowance based on their evaluation of information availableat the time of their examinations.

19

----

The following table presents an analysis of theallowance for loan losses for the periods presented:
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)**            | ** ** |
| Balance at  beginning of period                |       | $                                               | 9,256      |                                          | $          | 8,689 |   | $ | 8,842 |   | $ | 8,367 |   |
| Provision for  loan losses                     |       | 900                                             |       | 825                                           |       | 2,800 |   | 1,350 |   |
| Total charge-offs                              |       | (73                                             | )          | (191                                          | )          | (1,642 | ) | (430 | ) |
| Total recoveries                               |       | 33                                              |       | 41                                            |       | 116 |   | 77 |   |
| Net charge-offs                                |       | (40                                             | )          | (150                                          | )          | (1,526 | ) | (353 | ) |
| Balance at end  of period                      |       | $                                               | 10,116     |                                          | $          | 9,364 |   | $ | 10,116 |   | $ | 9,364 |   |
|                                           |       |                                            |       |                                          |       |   |   |   |   |
| Gross loans at  end of period                  |       | $                                               | 1,098,946  |                                          | $          | 995,620 |   | $ | 1,098,946 |   | $ | 995,620 |   |
| Ratio of  allowance to total loans             |       | 0.92                                            | %          | 0.94                                          | %          | 0.92 | % | 0.94 | % |
| Ratio of net  charge-offs to average loans (1) |       | 0.01                                            | %          | 0.06                                          | %          | 0.29 | % | 0.08 | % |

----

(1)             Netcharge-offs are annualized for the purposes of this calculation.

Net charge-offs for the three months ended June 30,2006 totaled $40 thousand, a decrease of $110 thousand (73.3%) from $150thousand for the three months ended June 30, 2005.  The majority of thecharge-offs were installment loans.  The provision for loan lossesincreased by $75 thousand (9.1%) for the three months ended June 30, 2006, dueto management’s analysis of current non-performing loans.

Net charge-offs for the six months ended June 30, 2006totaled $1.5 million, an increase of $1.2 million (332.3%) from $353 thousandfrom the six months ended June 30, 2005.  The majority of the charge-offswere commercial loans.  The provision for loan losses increased by $1.4million (107.4%) for the six months ended June 30, 2005.  Both the additional provision and theadditional charge-offs were primarily due to a single commercial loan of $950thousand that was provided for and charged off during the first quarter of2006.

The following table sets forth the allocation of theallowance for loan losses for the periods presented and the percentage of loansin each category to total loans. An allocation for a loan classification isonly for internal analysis of the adequacy of the allowance and is not anindication of expected or anticipated losses:
| ** **                              | ** ** | **At June 30, 2006**  | ** ** | **At December 31, 2005** | ** ** | **At June 30, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **Amount**                           | ** ** | **Percent**                             | ** ** | **Amount**                          | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                              |       | $                                    | 3,396      |                                    | 9.86       | %                                   | $          | 2,934 |   | 9.16 | % | $ | 2,624 |   | 9.62 | % |
| Commercial and  residential real estate |       | 3,069                                |       | 65.68                                   |       | 3,086                               |       | 67.90 |   | 3,996 |   | 70.12 |   |
| Construction  real estate               |       | 2,621                                |       | 19.28                                   |       | 1,993                               |       | 17.43 |   | 1,909 |   | 14.80 |   |
| Installment and  other                  |       | 1,049                                |       | 5.18                                    |       | 813                                 |       | 5.51 |   | 810 |   | 5.46 |   |
| Unallocated                             |       | (19                                  | )          | N/A                                     |       | 16                                  |       | N/A |   | 25 |   | N/A |   |
| Total                                   |       | $                                    | 10,116     |                                    | 100.00     | %                                   | $          | 8,842 |   | 100.00 | % | $ | 9,364 |   | 100.00 | % |

----

N/A—not applicable

20

----

The portion of the allocationthat was based upon historical loss experience decreased by $1.7 million in2006, from $2.9 million on June 30, 2005 to $1.2 million on June 30,2006.  This was largely due to a decrease in the allocation for commercialand residential real estate loans of $1.8 million and a decrease in theallocation for construction real estate loans of $525 thousand.  These decreases were partially offset by anincrease in the allocation for installment and other loans of $578thousand.  Concentration allocation increased $2.2 million (42.3%), from$5.1 million on June 30, 2005 to $7.3 million on June 30, 2006.  This wasdue to an increase in the allocation for construction real estate loans of $1.2million and an increase in the allocation for commercial and residential realestate loans of $1.1 million.  Theseincreases were partially offset by a lower allocation in installment and otherloans of $339 thousand.  The allocation for specifically identified loansincreased by $333 thousand (25.4%), from $1.3 million on June 30, 2005 to $1.6million on June 30, 2006.  A single commercial loan relationship that wasspecifically identified in both periods had an increased allocation of $383thousand from June 30, 2005 to June 30, 2006.

We expect continued growth in our loan portfolio asthe pace of economic expansion in the New Mexico economy has picked upsignificantly during the past year along with continued increases in interestrates. We anticipate the volume of commercial real estate and constructionloans to increase as the construction industry employment figure stands at4,600 above a year earlier, a 9.1% increase, with new business continuing toenter the state. Commercial real estate has strengthened over the past severalyears due to vacancy rates returning to their historical averages and demandpicking up due to new business looking to expand within the state. The housingmarket for homes below $500 thousand remains strong as the housing sectorposted another double-digit gain in total permits. We expect residential realestate for property worth greater than $1.5 million to continue to be soft.Total net charge-offs were substantially more in the first three months of 2006than in the same period in 2005 due to a single large commercial loan, howevercharge offs returned to more historic levels in the second quarter of 2006.

Additions to the allowance for loan losses, which arecharged to earnings through the provision for loan losses, are determined basedon a variety of factors, as indicated above. Although we believe the allowancefor loan losses is sufficient to cover probable losses inherent in the loanportfolio, there can be no assurance that the allowance will prove sufficientto cover actual loan losses.

***Potential Problem Loans.*****The Company utilizes an internal assetclassification system as a means of reporting problem and potential problemassets. At scheduled Board of Directors meetings every quarter, a list of totaladversely classified assets is presented, showing OREO, other repossessedassets, and all loans listed as “Substandard,” “Doubtful” and “Loss.”  Allnon-accrual loans are classed either as “Substandard” or “Doubtful” and arethus included in total adversely classified assets. A separate watch list ofloans classified as “Special Mention” is also presented. An asset is classifiedSubstandard if it is inadequately protected by the current net worth and payingcapacity of the obligor or of the collateral pledged, if any. Substandardassets include those characterized by the distinct possibility that the Companywill sustain some loss if the deficiencies are not corrected. Assets classifiedas Doubtful have all the weaknesses inherent in those classified Substandardwith the added characteristic that the weaknesses present make collection orliquidation in full, on the basis of currently existing facts, conditions andvalues, highly questionable and improbable. Assets classified as Loss are thoseconsidered uncollectible and viewed as non-bankable assets, worthy of charge-off.Assets that do not currently expose the Company to sufficient risk to warrantclassification in one of the aforementioned categories, but possess weaknessesthat may or may not be within the control of the customer are deemed to beSpecial Mention.

The Company’s determination as to the classificationof its assets and the amount of its valuation allowances is subject to reviewby the Bank’s primary regulators, which can order the establishment ofadditional general or specific loss allowances. The Comptroller of theCurrency, in conjunction with the other federal banking agencies, has adoptedan interagency policy statement on the allowance for loan losses. The policystatement provides guidance for financial institutions on both theresponsibilities of management for the assessment and establishment of adequateallowances and guidance for banking agency examiners to use in determining theadequacy of general valuation guidelines. Generally, the policy statementrecommends that (i) institutions have effective systems and controls toidentify, monitor and address asset quality problems; (ii) management hasanalyzed all significant factors that affect the collectibility of theportfolio in a reasonable manner; and (iii) management has established acceptableallowance evaluation processes that meet the objectives set forth in the policystatement. Management believes it has established an adequate allowance forprobable loan losses. The Company analyzes its process regularly, withmodifications made, if needed, and reports those results quarterly at Board ofDirectors meetings. However, there can be no assurance that regulators, inreviewing the Company’s loan portfolio, will not request the Company tomaterially increase its allowance for loan losses. Although management believesthat adequate specific and general loan loss allowances have been established,actual losses are dependent upon future events and, as such, further additionsto the level of specific and general loan loss allowances may become necessary.

21

----

The following table shows theamounts of adversely classified assets and special mention loans as of theperiods indicated:
| ** **                         | ** ** | **At June 30,  2006**      | ** ** | **At December 31,  2005** | ** ** | **At June 30, 2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Loans classified  as:              |       |                                 |       |                                |       |                                |       |
| Substandard                        |       | $                                    | 12,957     |                                | $          | 14,484                              |       | $ | 22,492 |   |
| Doubtful                           |       | 1,646                                |       | 1,414                               |       | 1,296                               |       |
| Total adversely  classified loans  |       | 14,603                               |       | 15,898                              |       | 23,788                              |       |
| Other real  estate owned           |       | 290                                  |       | 375                                 |       | 2,654                               |       |
| Other  repossessed assets          |       | 56                                   |       | 27                                  |       | 24                                  |       |
| Total adversely  classified assets |       | $                                    | 14,949     |                                | $          | 16,300                              |       | $ | 26,466 |   |
|                               |       |                                 |       |                                |       |                                |       |
| Special mention loans              |       | $                                    | 3,824      |                                | $          | 14,836                              |       | $ | 12,195 |   |

 

Total adversely classified assetsdecreased $11.5 million (43.5%) from June 30, 2005 to June 30, 2006.  Themain reason was a decrease of $9.5 million in substandard loans and a decreaseof $2.4 million in other real estate owned.  Substandard loans decreasedbecause of  approximately $3.9 million incommercial loans and $2.4 million in commercial real estate loans that werepaid-down and/or upgraded along with two commercial charge offs during theperiod which approximated $2.5 million. Special mention loans decreased $8.4 million (68.6%) between June 30,2005 and June 30, 2006, primarily due to a reduction of commercial real estateloans residing in the risk category.

**Sources of Funds**

***Liquidityand Sources of Capital***

The Company’s cash flows arecomprised of three classifications: cash flows from operating activities, cashflows from investing activities and cash flows from financing activities. Netcash provided by operating activities was $11.3 million and $5.2 million forthe six months ended June 30, 2006 and 2005 respectively.  Net cashprovided by operating activities increased $6.1 million in the first six monthsof 2006 compared to the first six months of 2005 largely due to a decrease inthe origination of loans held for sale, net of sales, by $4.3 million over thefirst six months of 2005.  In addition,there was an increase in cash provided by other assets of $1.6 million. Net cash used in investing activities was $(58.7) million and $(77.4) millionfor the six months ended June 30, 2006 and 2005, respectively.  The $18.7million decrease in cash used by investing activities was largely due to a dropin loans funded, net of repayments, of $21.0 million.  Net cash provided by financing activities was$22.0 million and $85.9 million for the six months ended June 30, 2006 and2005, respectively.  The $63.9 million decrease in cash provided byfinancing activities was mainly due to a decrease in new deposit growth of $88.0million from the first six months of 2006 compared to the first six months of2005, as well as a decrease in cash provided by the issuance of trust preferredsecurities of $10.3 million.  This waspartially offset by a decrease in cash used by borrowings (net of repayments)of $30.9 million and a decrease in the purchase of treasury stock of $3.6million.

In the event that additional short-term liquidity isneeded, we have established relationships with several large regional banks toprovide short-term borrowings in the form of federal funds purchases. We haveborrowed, and management believes that we could again borrow up to$117.0 million for a short time from these banks on a collective basis.Additionally, we are a member of the FHLB and have the ability to borrow fromthe FHLB. As a contingency plan for significant funding needs, theAsset/Liability Management committee may also consider the sale of investmentsecurities, selling securities under agreement to repurchase, sale of certainloans and/or the temporary curtailment of lending activities.

At June 30, 2006, the Company’stotal risk-based capital ratio was 11.40%, the Tier 1 capital to risk-weightedassets ratio was 9.93%, and the Tier 1 capital to average assets ratio was8.45%.  At December 31, 2005, the Company’stotal risk-based capital ratio was 11.67%, the Tier 1 capital to risk-weightedassets ratio was 10.10%, and the Tier 1 capital to average assets ratio was8.19%.

At June 30, 2006, the Bank’stotal risk-based capital ratio was 11.04%, the Tier 1 capital to risk-weightedassets ratio was 10.09%, and the Tier 1 capital to average assets ratio was8.59%.  At December 31, 2005, the Bank’stotal risk-based capital ratio was 11.30%, the Tier 1 capital to risk-weightedassets ratio was 10.41%, and the Tier 1 capital to average assets ratio was8.43%.  The Bank was categorized as “well-capitalized”under Federal Deposit Insurance Corporation regulations at June 30, 2006 andDecember 31, 2005.

At June 30, 2006 and December 31,2005, the Company’s book value per common share was $12.01 and $11.54,respectively.

 

22

----

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

**Asset Liability Management**

The Company’s net interest incomeis subject to “interest rate risk” to the extent that it can vary based onchanges in the general level of interest rates. It is the Company’s policy tomaintain an acceptable level of interest rate risk over a range of possiblechanges in interest rates while remaining responsive to market demand for loanand deposit products.  The strategyemployed by the Company to manage its interest rate risk is to measure its riskusing an asset/liability simulation model and adjust the maturity of securitiesin its investment portfolio to manage that risk.

Interest rate risk can also bemeasured by analyzing the extent to which the repricing of assets andliabilities are mismatched to create an interest sensitivity “gap”.  An asset or liability is said to be interestrate sensitive within a specific time period if it will mature or repricewithin that time period.  The interestrate sensitivity gap is defined as the difference between the amount ofinterest earning assets maturing or repricing within a specific time period andthe amount of interest bearing liabilities maturing or repricing within thatsame time period.  A gap is considered positivewhen the amount of interest rate sensitive assets exceeds the amount ofinterest rate sensitive liabilities.  Agap is considered negative when the amount of interest rate sensitiveliabilities exceeds the amount of interest rate sensitive assets.  During a period of rising interest rates,therefore, a negative gap would tend to adversely affect net interestincome.  Conversely, during a period offalling interest rates, a negative gap position would tend to result in anincrease in net interest income.

The following table sets forththe amounts of interest earning assets and interest bearing liabilitiesoutstanding at June 30, 2006, which are anticipated by the Company, based uponcertain assumptions, to reprice or mature in each of the future time periodsshown. Except as stated below, the amount of assets and liabilities shown whichreprice or mature during a particular period were determined based on theearlier of the term to repricing or the term to repayment of the asset orliability.  The table is intended toprovide an approximation of the projected repricing of assets and liabilitiesat June 30, 2006 on the basis of contractual maturities and scheduled rateadjustments within a three-month period and subsequent selected timeintervals.  The loan amounts in the tablereflect principal balances expected to be reinvested and/or repriced as aresult of contractual amortization and rate adjustments on adjustable-rateloans. Loan and investment securities contractual maturities and amortizationreflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustablerates, it is assumed that the interest rates on these accounts will not adjustimmediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts willreprice based upon an historical analysis of rate changes of these particularaccounts, with repricing assigned to these accounts from one to 11 months.

23

----

 
| ** **                                              | ** ** | **Time to Maturity or Repricing** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **As of June 30, 2006:**            | ** ** | **0-90 Days**                                    | ** ** | **91-365 Days** | ** ** | **1-5 Years** | ** ** | **Over 5 Years** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **(In thousands)**                               | ** ** |
| **Interest-Earning  Assets:**                           |       |                                                  |       |   |   |   |   |   |   |   |   |
| Loans                                                   |       | $                                                     | 538,289    |   | $ | 439,247 |   | $ | 59,871 |   | $ | 61,539 |   | $ | 1,098,946 |   |
| Loans held for  sale                                    |       | 6,093                                                 |       | — |   | — |   | — |   | 6,093 |   |
| Investment  securities                                  |       | 21,961                                                |       | 35,245 |   | 36,064 |   | 8,355 |   | 101,625 |   |
| Securities  purchased under agreements to resell        |       | 137                                                   |       | — |   | — |   | — |   | 137 |   |
| Interest bearing  deposits with banks                   |       | 81                                                    |       | — |   | — |   | — |   | 81 |   |
| Investment in  unconsolidated trusts                    |       | 186                                                   |       | — |   | — |   | 806 |   | 992 |   |
| Total interest-earning assets                           |       | $                                                     | 566,747    |   | $ | 474,492 |   | $ | 95,935 |   | $ | 70,700 |   | $ | 1,207,874 |   |
|                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| **Interest-Bearing  Liabilities:**                      |       |                                                  |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposit accounts                  |       | $                                                     | 150,371    |   | $ | 95,167 |   | — |   | — |   | $ | 245,538 |   |
| Savings deposits                                        |       | 158,684                                               |       | 82,981 |   | — |   | — |   | 241,665 |   |
| Time deposits                                           |       | 138,924                                               |       | 220,436 |   | $ | 99,891 |   | $ | 4,774 |   | 464,025 |   |
| Short- and  long-term borrowings                        |       | 28,712                                                |       | 12,729 |   | 18,912 |   | 44,683 |   | 105,036 |   |
| Borrowings made  by ESOP to outside parties             |       | 743                                                   |       | — |   | — |   | — |   | 743 |   |
| Junior  subordinated debt owed to unconsolidated trusts |       | 6,186                                                 |       | — |   | — |   | 26,806 |   | 32,992 |   |
| Total interest-bearing liabilities                      |       | $                                                     | 483,620    |   | $ | 411,313 |   | $ | 118,803 |   | $ | 76,263 |   | $ | 1,089,999 |   |
|                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Rate sensitive  assets (RSA)                            |       | $                                                     | 566,747    |   | $ | 1,041,239 |   | $ | 1,137,174 |   | $ | 1,207,874 |   | $ | 1,207,874 |   |
| Rate sensitive  liabilities (RSL)                       |       | 483,620                                               |       | 894,933 |   | 1,013,736 |   | 1,089,999 |   | 1,089,999 |   |
| Cumulative GAP  (GAP=RSA-RSL)                           |       | 83,127                                                |       | 146,306 |   | 123,438 |   | 117,875 |   | 117,875 |   |
| RSA/Total assets                                        |       | 44.58                                                 | %          | 81.90 | % | 89.44 | % | 95.01 | % | 95.01 | % |
| RSL/Total assets                                        |       | 38.04                                                 | %          | 70.39 | % | 79.74 | % | 85.73 | % | 85.73 | % |
| GAP/Total assets                                        |       | 6.54                                                  | %          | 11.51 | % | 9.70 | % | 9.28 | % | 9.28 | % |
| GAP/RSA                                                 |       | 14.67                                                 | %          | 14.05 | % | 10.85 | % | 9.76 | % | 9.76 | % |

 

Certain shortcomings are inherent in the method ofanalysis presented in the foregoing table. For example, although certain assetsand liabilities may have similar maturities or periods to repricing, they mayreact in different degrees to changes in market interest rates. Also, theinterest rates on certain types of assets and liabilities may fluctuate inadvance of changes in market interest rates, while interest rates on other typesof assets may lag behind changes in market rates.  Additionally, in theevent of a change in interest rates, prepayment and early withdrawal levelswould likely deviate significantly from those assumed in calculating thetable.  Therefore, the Company does not rely solely on a gap analysis tomanage its interest rate risk, but rather it uses what it believes to be themore reliable simulation model relating to changes in net interest income asset forth below.

Changes in net interest income between the periodsbelow reflect changes in the composition of interest-earning assets andinterest-bearing liabilities, related interest rates, repricing frequencies,and the fixed or variable characteristics of the interest-earning assets andinterest-bearing liabilities.  Projections of income given by the modelare not actual predictions, but rather show our relative interest raterisk.  Actual interest income may vary from model projections.  Basedon simulation modeling at June 30, 2006 and December 31, 2005, the Company’snet interest income would change over a one-year time period due to changes ininterest rates as follows:

**Changein Net Interest Income Over One Year Horizon**

| Changes in Levels of | ** ** | **At June 30, 2006**  | ** ** | **At December 31, 2005** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **Interest Rates**             | ** ** | **Dollar Change**               | ** ** | **Percentage Change**              | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| + 2.00                              | %          | $                                    | (3,940     | )                                       | (8.69      | )% | $ | (3,093 | ) | (7.21 | )% |
| + 1.00                              |       | (1,070                               | )          | (2.36                                   | )          | (948 | ) | (2.21 | ) |
| (1.00                               | )          | 757                                  |       | 1.67                                    |       | 1,047 |   | 2.44 |   |
| (2.00                               | )          | 1,696                                |       | 3.74                                    |       | 721 |   | 1.68 |   |
|                                     |            |                                      |            |                                         |            |  |  |  |  |  |  |

 

                         Simulations used by the Companyassume the following:

1.                  Changesin interest rates are immediate.

24

----

2.                  Itis the Company’s policy that interest rate exposure due to a 2.00% interestrate rise or fall be limited to 15.0% of the Company’s annual net interestincome, as forecasted by the simulation model. As demonstrated by the tableabove, the Company’s interest rate risk exposure was within this policy at June30, 2006.

**Item 4.  Controls and Procedures.**

**Evaluation of Disclosure Controls and Procedures**

Asrequired by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of1934, management has evaluated, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on their evaluation, management concluded our disclosure controls andprocedures (as defined in Securities Exchange Act Rules 13a-15(e) and15d-15(e)) were effective as of June 30, 2006 to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules and formsand were effective as of June 30, 2006.  These disclosure controls andprocedures include controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

**Changes in Internal Control over Financial Reporting.**

There have been no changes to our internal controlsover financial reporting during the last fiscal quarter that have affected, orare reasonably likely to affect, our internal controls over financialreporting.

**PART II — OTHER INFORMATION**

**Item 1.   Legal Proceedings**

Neither Trinity, the Bank, TitleGuaranty, TCC Appraisal Services, TCC Advisors or TCC Funds are involved in anypending legal proceedings other than routine legal proceedings occurring in thenormal course of business, which, in the opinion of management, in theaggregate, are material to our consolidated financial condition.

**Item 1A. Risk Factors**

In addition to the other information in this QuarterlyReport on Form 10-Q, shareholders or prospective investors should carefullyconsider the risk factors appearing in Trinity’s Form 10-K for the year-ending2005 filed with the Securities and Exchange Commission on March 16, 2006beginning on page 9. There have been no material changes to the risk factors aspreviously disclosed in Trinity’s Form 10-K.

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

None

**Item 3.  Defaults Upon SeniorSecurities**

None

**Item 4.  Submission of Mattersto a Vote of Security Holders**

At the Annual Meeting of Stockholders held on May 11,2006, Jeffrey F. Howell, Arthur B. Montoya, Jr., and Stanley D. Primak wereelected to serve as Class III Directors of the Company until the 2009 AnnualMeeting. Continuing as Class I Directors, with a term expiring in 2007, are:William C. Enloe, Deborah U. Johnson, Lewis A. Muir and Charles A. Slocomb;continuing as Class II Directors, with a term expiring in 2008, are: JerryKindsfather, Steve W. Wells and Robert P. Worcester.  In addition, the shareholders ratified theappointment of Moss Adams, LLP as the Company’s independent registered publicaccounting firm for 2006.

25

----

The voting for each matter was as follows:

1.                                       Electionof directors:

| **NOMINEE**             | **FOR**    | **WITHHOLD** |
|-------------------------|------------|--------------|
| ** **              | ** ** | ** **   |
| Jeffrey F.  Howell      | 4,332,645  | 325,521      |
|                    |       |         |
| Arthur B.  Montoya, Jr. | 4,578,586  | 79,580       |
|                    |       |         |
| Stanley D.  Primak      | 4,337,113  | 321,053      |

 

2.                                       Ratification of the appointment of MossAdams, LLP as the Company’s independent registered public accounting firm forthe fiscal year ending December 31, 2006:

| **For**   | **Against** | **Abstain** |
|-----------|-------------|-------------|
| 4,678,330 | 0           | 57,116      |

** **

**Item 5.  Other Information**

None

**Item 6.  Exhibits**
| 31.1 | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                       |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                       |
| 32.1 | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

** **

26

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                       | **TRINITY CAPITAL CORPORATION** |
|-----------------------|---------------------------------|
|                  |                            |   |
| Date: August 9,  2006 | By:                             | /s/  WILLIAM C. ENLOE |
|                  |                            | William C.  Enloe |
|                  |                            | President and  Chief Executive Officer |
|                  |                            |   |
| Date: August 9,  2006 | By:                             | /s/ DANIEL R.  BARTHOLOMEW |
|                  |                            | Daniel R.  Bartholomew |
|                  |                            | Chief Financial  Officer |

 

 

27

----